When your company crosses ₹5 crore in profit, CSR stops being optional
For a growing private company, there is a threshold that changes the arithmetic of profit. The moment you cross it, 2% of your profits is no longer entirely the shareholders' to keep — it must be spent on social good, tracked, reported to the Registrar, and, if you fail to spend it, parked in a government-monitored account with penalties attached. This is Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013. Since the 2021 amendments it stopped being a soft "comply or explain" rule and became a hard, penalty-backed obligation. Here is exactly who it catches, what it demands, and the tax sting most founders miss.
The three triggers — cross any one and you're in
Section 135(1) applies to a company if, in the immediately preceding financial year, it had any one of:
- Net worth of ₹500 crore or more, or
- Turnover of ₹1,000 crore or more, or
- Net profit of ₹5 crore or more.
It is "any one of the three", not all three. For most profitable, owner-run companies, the one that catches them is the ₹5 crore net-profit trigger — you can be a modest business by revenue and still be squarely inside CSR. Once you are in, you stay in until the company fails to meet all three thresholds for three consecutive financial years.
What you must spend: 2% of average net profit
An applicable company must spend, in every financial year, at least 2% of the average net profits of the three immediately preceding financial years on CSR. Two details matter here. First, "net profit" is not your accounting profit after tax — it is the figure computed under Section 198 of the Act (the same basis used for managerial remuneration), with specified adjustments. Second, if the company has existed for less than three years, you take the average of the years available. Getting the Section 198 number right is where the CA earns their keep, because it drives the whole obligation.
The CSR Committee — and when you don't need one
Where CSR applies, the Board ordinarily constitutes a CSR Committee of three or more directors, at least one of whom is an independent director (with relaxations for companies that are not required to have an independent director). The Committee formulates the CSR Policy, recommends the activities and the amount to be spent, and monitors the spend.
But there is a practical relief: under Section 135(9), where the amount required to be spent does not exceed ₹50 lakh, the requirement to constitute a CSR Committee does not apply, and the Board itself discharges those functions. Most companies caught only by the ₹5 crore profit trigger fall under this ceiling, so they run CSR at Board level without a separate committee.
Where the money can go: Schedule VII, and Form CSR-1
CSR spend is not open-ended charity. It must fall within the activities listed in Schedule VII of the Act — education, healthcare, eradicating hunger and poverty, environmental sustainability, gender equality, rural and slum development, disaster management, contributions to the PM CARES Fund and the PM National Relief Fund, and so on. Two guardrails catch companies out:
- Implementing agencies must be registered. If you route CSR funds through a trust, society or Section 8 company rather than doing the work yourself, that agency must be registered with the MCA by filing Form CSR-1 and must hold a CSR Registration Number. Money channelled through an unregistered agency is disallowed and treated as not spent, however genuinely it was deployed.
- Administrative overheads are capped at 5% of total CSR expenditure, and activities undertaken in the normal course of business — or benefiting only your own employees — do not count as CSR.
Unspent CSR: you can't just keep it
This is the part that changed the game. Since 2021 you cannot simply under-spend and note it in the Board's report. If you do not spend the full 2%:
- For an ongoing project: transfer the unspent amount to a separate "Unspent CSR Account" in a scheduled bank within 30 days of the end of the financial year, and spend it on that project within three years. If it is still unspent after three years, transfer it to a Schedule VII fund within 30 days.
- For anything that is not an ongoing project: transfer the unspent amount to a fund specified in Schedule VII (such as the PM National Relief Fund) within six months of the end of the financial year.
The one piece of flexibility running the other way: if you over-spend in a year, the excess can generally be set off against your CSR obligation for the next three financial years, subject to conditions.
The reporting: CSR-2 and the Board's report
CSR is disclosed in two places. The Board's Report must carry the CSR details — the policy, the composition of the committee (if any), the amount required and the amount spent, and reasons for any shortfall. Separately, companies file Form CSR-2, a detailed CSR report, with the Registrar after the annual financial statements (Form AOC-4) are filed. Miss the reporting and you have a filing default on top of any spending default.
The penalties now have teeth (Section 135(7))
Failing to transfer the unspent amount is no longer a slap on the wrist. Under Section 135(7), a defaulting company is liable to a penalty of twice the unspent amount required to be transferred to the Unspent CSR Account or the Schedule VII fund, or ₹1 crore, whichever is less. Every officer in default is liable to one-tenth of that unspent amount, or ₹2 lakh, whichever is less. It is a civil penalty adjudicated by the Registrar rather than a prosecution — but it is close to automatic, and the "twice the unspent amount" formula means the penalty can dwarf the CSR sum you tried to avoid spending.
The tax sting: CSR spend isn't deductible
Here is the trap founders consistently miss. CSR expenditure is not allowed as a business deduction. Explanation 2 to Section 37(1) of the Income-tax Act, 1961 provides that expenditure incurred on CSR activities is not deemed to be incurred for the purposes of business, so it cannot be claimed under Section 37. Certain Schedule VII contributions — for example, to specified funds — may separately qualify for a deduction under Section 80G, but the general run of CSR spend is a post-tax cost. Budget for it as 2% of profit spent out of after-tax money, not as a deductible business expense.
Where this fits in running your company
CSR is a governance obligation that rides on your profit numbers and your annual filings, so read it alongside the AOC-4 and MGT-7 annual filing walkthrough where the CSR reporting lives, and the board meetings and minutes guide that carries the CSR Policy and spend approvals. Since CSR decides what happens to a slice of profit before you distribute the rest, pair it with the dividend declaration guide. If you plan to run your CSR through your own foundation, the Section 8 non-profit company is the usual implementing vehicle. All of it sits under our pillar guide to the private limited compliance calendar.
How we handle it at RDA, Baner
At RDA Advisory in Baner, Pune, we run CSR compliance end to end — computing the Section 198 net profit and the 2% obligation correctly, deciding whether you need a CSR Committee or can run it at Board level, checking that your implementing agency holds a valid CSR-1 registration, drafting the CSR Policy and the Board's-report disclosure, filing Form CSR-2 on time, and managing the unspent-account and Schedule VII transfers so you never trip the Section 135(7) penalty. We also flag the income-tax treatment up front so the 2% is budgeted as the post-tax cost it really is. You will find us at Office No. 102, Snehraj Apartment, Baner, Pune 411045, on +91 77570 45059.
Book a consult at rdatax.in
Has your company crossed a CSR threshold, or are you close to it? We will tell you whether Section 135 applies, calculate exactly what you must spend, and set up the policy, the spend and the filings so it is fully compliant and penalty-proof. Book a consultation at rdatax.in or call the Baner office.
Verification note: this guide explains Corporate Social Responsibility under Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014 as amended — including the applicability thresholds (net worth of ₹500 crore, turnover of ₹1,000 crore, or net profit of ₹5 crore in the immediately preceding financial year), the obligation to spend at least 2% of the average net profits of the three preceding financial years computed under Section 198, the CSR Committee requirement and the Section 135(9) relief where the amount to be spent does not exceed ₹50 lakh, the Schedule VII list of permitted activities, the registration of implementing agencies through Form CSR-1, reporting through Form CSR-2, the unspent-CSR treatment (transfer to an Unspent CSR Account within 30 days for ongoing projects with a three-year spend window, or to a Schedule VII fund within six months otherwise), the Section 135(7) penalties, and the disallowance of CSR expenditure as a business deduction under Explanation 2 to Section 37(1) of the Income-tax Act, 1961. Thresholds, forms, timelines and the rules are periodically revised — confirm the current position for your company with your CA and company secretary before acting.
