What Is the Minimum CSR Spending Requirement in India?

India remains one of the few jurisdictions in the world where corporate social responsibility spending is not voluntary but a statutory mandate. Under Section 135 of the Companies Act, 2013, every company that meets prescribed financial thresholds must spend at least 2% of the average net profit of the three immediately preceding financial years on eligible CSR activities listed in Schedule VII. The obligation applies to public and private companies alike, including subsidiaries of foreign parents, once any single threshold for net worth, turnover or net profit is crossed in the immediately preceding financial year.

For compliance teams planning their FY 2026–27 budgets, the landscape has grown more complex: the Ministry of Corporate Affairs (MCA) has introduced amendments to the CSR Policy Rules, and SEBI’s evolving Social Stock Exchange (SSE) framework now intersects directly with CSR reporting in India.

• Who must spend: Companies with net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore in the immediately preceding financial year.
• How much: A minimum of 2% of average net profit computed over the three immediately preceding financial years.
• Key filings: CSR-1 form on the MCA portal, plus mandatory disclosures in the Board’s Report.
• 2026 development: MCA and SEBI guidance on the treatment of SSE instruments as qualifying CSR expenditure, compliance teams should document board approvals carefully.

Minimum CSR Spending Requirement, the 2% Rule Under Section 135

Section 135(5) of the Companies Act, 2013 states that the Board of every company to which the section applies “shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years.” This single sentence is the statutory foundation of what practitioners call the CSR 2% rule in India. The average net profit is computed in accordance with Section 198 of the Act, which provides the mechanics for arriving at “net profit” by excluding certain items such as premium on shares and debentures, profits on sale of forfeited shares and capital receipts.

The Companies (Corporate Social Responsibility Policy) Rules, 2014, and their subsequent amendments, operationalise this mandate. They prescribe the formation of a CSR Committee, the contents of the CSR Policy, the registration of implementing agencies via Form CSR-1, the treatment of unspent amounts, and the annual reporting format. Companies that have been in existence for fewer than three financial years must calculate the average net profit based on the financial years available since incorporation.

Statutory Citation and Rules

Primary statute: Section 135, Companies Act, 2013 (read with Section 198 for net-profit computation). Delegated legislation: Companies (Corporate Social Responsibility Policy) Rules, 2014, as amended through the Companies (CSR Policy) Amendment Rules. Schedule of eligible activities: Schedule VII to the Companies Act, 2013.

Who Is Required to Spend: Section 135 Applicability and Thresholds

The CSR obligation under Section 135 of the Companies Act is triggered when a company meets any one of three financial thresholds in the immediately preceding financial year. These thresholds are tested on a standalone basis, that is, each company (including each subsidiary) checks its own financials independently. There is no group-level aggregation for the purpose of determining applicability.

A common misconception involves the “once applicable, always applicable” question. The CSR Rules clarify that a company must constitute its CSR Committee and comply with Section 135 in the financial year when it first meets any threshold. If, in subsequent years, the company no longer meets any threshold for three consecutive financial years, it is not required to constitute a CSR Committee or comply with the spending mandate until a threshold is met again. However, any ongoing CSR project commitments made during the applicable period must still be honoured and reported.

Entities That Typically Trigger CSR Obligations

Section 135 applies to “every company”, this includes public companies, private companies, one-person companies, and Indian subsidiaries of foreign parents. Limited Liability Partnerships (LLPs) are not “companies” under the Companies Act and are therefore outside the scope of Section 135 of the Companies Act. Foreign companies that have a branch office or project office in India are generally not covered unless they have incorporated a subsidiary, although industry observers expect future regulatory clarity on this point.

How to Calculate the CSR 2% Rule in India, Worked Examples

Calculating the minimum CSR spending requirement involves a straightforward three-step process. Errors most frequently arise in step one, the computation of net profit under Section 198, where companies inadvertently include or exclude the wrong line items.

Step 1: Compute net profit for each of the three immediately preceding financial years using Section 198 of the Companies Act. This figure differs from “profit after tax” shown in audited accounts. Key exclusions: premium on shares/debentures, profits from the sale of forfeited shares, and capital receipts (including profits on the sale of an undertaking). Key inclusions: the usual credits to the profit and loss account from business operations.

Step 2: Calculate the simple arithmetic average of the three-year net profits.

Step 3: Multiply the average by 2% to arrive at the minimum required CSR spend for the current financial year.

Example A, Mid-Size Private Company

Example B, Large Listed Company

An important practical note: the calculation must be performed on a standalone basis for each company, not on consolidated financials. If a holding company and its subsidiary both independently meet Section 135 thresholds, each must compute and spend separately.

Excess CSR Spend, Carry Forward and Set-Off

Under the Companies (CSR Policy) Amendment Rules, if a company spends more than the mandated 2% in a given financial year, the excess amount may be set off against the CSR spending requirement for the immediately succeeding three financial years. The Board must approve this set-off and record it in the CSR report annexed to the Board’s Report. Proper documentation, including a Board resolution specifying the set-off amount and the year(s) of intended adjustment, is essential to withstand regulatory scrutiny.

Eligible CSR Activities and Schedule VII, What Counts as CSR Expenditure

Schedule VII to the Companies Act, 2013 enumerates the broad categories of CSR activities that qualify. These include eradicating hunger and poverty, promoting education and gender equality, ensuring environmental sustainability, supporting armed forces veterans, promoting sports, contributing to technology incubators in academic institutions, and undertaking rural development projects, among others. The schedule has been expanded through periodic amendments to include disaster management, contributions to PM CARES Fund, and measures for the benefit of senior citizens.

Crucially, not everything labelled “CSR” qualifies. The Rules explicitly exclude activities undertaken in the normal course of business, activities benefiting only the company’s employees and their families, contributions to political parties, and sponsorship expenditure aimed at deriving marketing benefit. Administrative overheads related to CSR implementation are capped at 5% of the total CSR expenditure for the financial year.

Capital Projects and Multi-Year CSR Projects, Treatment of Unspent Amounts

Companies may undertake CSR activities as ongoing projects spanning multiple years. In such cases, any amount that remains unspent in a given financial year must be transferred to a special “Unspent CSR Account” opened with a scheduled bank within 30 days of the end of the financial year. This amount must then be spent within three financial years from the date of transfer. If the amount remains unspent even after three years, it must be transferred to a fund specified in Schedule VII (such as the PM National Relief Fund or PM CARES Fund).

CSR Governance: Board Duties, CSR Committee Requirements and Practical Templates

Every company to which Section 135 applies must constitute a CSR Committee of the Board consisting of three or more directors, of whom at least one must be an independent director. For private companies and unlisted public companies that are not required to appoint an independent director, the CSR Committee may comprise two or more directors. Where the CSR obligation is ₹50 lakh or less, the functions of the CSR Committee may be discharged by the Board itself, without constituting a separate committee.

The CSR Committee’s duties include formulating a CSR Policy that recommends eligible activities and the expenditure allocation, recommending the amount to be spent, and monitoring compliance. The Board must approve the CSR Policy and disclose it on the company’s website. Board minutes should reflect deliberation on the CSR recommendation, approval of the annual CSR action plan, and any rationale for shortfall or excess spending.

Sample Board Resolution (excerpt):

“RESOLVED THAT, pursuant to Section 135 and Schedule VII of the Companies Act, 2013 read with the Companies (CSR Policy) Rules, 2014, the Board hereby approves the CSR Annual Action Plan for FY 2026–27, as recommended by the CSR Committee, with a total allocation of ₹[amount], representing not less than 2% of the average net profit of the Company for the three immediately preceding financial years, and authorises the CSR Committee to oversee the implementation thereof.”

Maintaining a well-documented trail, from committee recommendation to Board approval to spend verification, is the single most effective risk mitigation strategy against regulatory queries.

Filings and CSR Reporting in India: CSR-1, Annual Report and MCA e-Forms

The filing and reporting obligations associated with CSR compliance in India operate at two levels: entity-level registration of implementing agencies and company-level annual disclosures.

Form CSR-1 is an electronic form filed on the MCA portal by entities (NGOs, trusts, Section 8 companies, or societies) that wish to undertake CSR activities on behalf of a company. Filing CSR-1 generates a unique CSR Registration Number. Companies are required to engage only those implementing agencies that hold a valid CSR-1 registration. The form requires details of the entity’s legal constitution, PAN, registration under applicable statutes, and a declaration of CSR activities to be undertaken. This is a one-time filing unless changes occur in the entity’s details.

At the company level, every company subject to Section 135 must annex a CSR Report to its Board’s Report. The prescribed format includes details of the CSR Policy, the composition of the CSR Committee, average net profit for the preceding three financial years, the prescribed 2% CSR spend, actual CSR spend, details of ongoing and completed projects, the amount transferred to the Unspent CSR Account (if any), and reasons for any shortfall.

Annual CSR Reporting in the Board’s Report and Website Disclosures

In addition to the Board’s Report, companies must disclose their CSR Policy on their website. Listed companies face additional scrutiny through Business Responsibility and Sustainability Reporting (BRSR) filings mandated by SEBI. The CSR Report must be signed by the chairperson of the CSR Committee (or a director authorised by the Board) and must form part of the annual filing with the Registrar of Companies.

CSR Compliance India 2026: MCA CSR Policy Amendments and Social Stock Exchange Treatment

The CSR regulatory environment for 2026 presents compliance teams with important new considerations. The MCA has progressed amendments to the Companies (CSR Policy) Rules that address, among other things, the intersection between CSR expenditure and instruments listed on SEBI’s Social Stock Exchange (SSE). The SSE, operational since 2022 under SEBI’s framework, enables social enterprises and non-profit organisations to raise funds through instruments such as Zero Coupon Zero Principal (ZCZP) instruments.

The emerging regulatory position, as industry observers expect from the latest MCA notifications and SEBI circulars, is that contributions by companies to SSE-listed instruments may, subject to conditions, qualify as eligible CSR expenditure. The likely practical effect will be that companies can direct a portion of their CSR spend toward ZCZP instruments issued by eligible social enterprises listed on the SSE, provided the underlying activity falls within Schedule VII and the implementing entity holds CSR-1 registration.

However, compliance teams should adopt a conservative approach pending final, definitive clarifications from both MCA and SEBI on the following operational questions:

• Valuation: How should the CSR spend be measured, at the subscription price of the ZCZP instrument, or at the grant-equivalent value?
• Documentation: Board minutes and CSR Committee recommendations should specifically reference the SSE instrument, the Schedule VII activity it supports, and the CSR-1 registration of the issuing social enterprise.
• Reporting: Disclose SSE-linked CSR expenditure as a separate line item in the CSR Report for transparency and audit trail purposes.

Early indications suggest that companies adopting SSE instruments for CSR will benefit from enhanced impact measurement (since SSE-listed entities are subject to SEBI disclosure norms), but the documentation burden on boards is higher. Compliance officers tracking these developments should monitor notifications on the MCA and regulatory update channels regularly.

Penalties for CSR Non-Compliance and Practical Risk Mitigation

The penalty framework for failure to comply with CSR obligations operates primarily through Section 135(7) of the Companies Act. If a company fails to spend the prescribed amount and does not transfer the unspent balance to the Unspent CSR Account or a Schedule VII fund within the mandated timelines, the company is liable to a penalty of twice the amount required to be transferred, or ₹1 crore, whichever is less. Every officer in default, typically the managing director, whole-time director, CFO, or company secretary, is also liable to a penalty of one-tenth of the unspent amount, or ₹2 lakh, whichever is less.

Beyond statutory penalties, CSR non-compliance carries reputational risk, attracts adverse observations in statutory audit reports, and may trigger scrutiny during inspections by the Registrar of Companies. Industry observers note a clear trend toward stricter enforcement, with the MCA issuing show-cause notices to companies that have consistently failed to meet the 2% minimum CSR spending requirement in India.

What to Do If You Cannot Spend, Practical Steps

• Identify the shortfall early, ideally by Q3 of the financial year, and escalate to the CSR Committee.
• Transfer unspent amounts (for ongoing projects) to a dedicated Unspent CSR Account within 30 days of the financial year-end.
• Transfer non-project unspent amounts to a fund specified in Schedule VII within six months of the financial year-end.
• Disclose reasons for the shortfall in the Board’s Report, transparent reporting reduces regulatory risk.

Quick Compliance Checklist for CSR in India

Use this ten-point checklist to ensure end-to-end CSR compliance India 2026:

1. Test thresholds: Verify whether any one of the three financial thresholds (net worth, turnover, net profit) was met in the immediately preceding financial year.
2. Constitute the CSR Committee: Appoint the required number of directors; record constitution in Board minutes.
3. Formulate the CSR Policy: Identify Schedule VII activities; obtain Board approval; publish on company website.
4. Compute the 2% spend: Calculate average net profit under Section 198 for the preceding three financial years and multiply by 2%.
5. Approve the Annual Action Plan: CSR Committee recommends; Board approves specific projects, budgets, and implementing agencies.
6. Verify implementing agency registration: Ensure every NGO, trust, or Section 8 company holds a valid CSR-1 registration on the MCA portal.
7. Execute and monitor spend: Disburse funds according to the action plan; CSR Committee monitors implementation quarterly.
8. Handle unspent amounts: Transfer unspent balances to the Unspent CSR Account or a Schedule VII fund within prescribed timelines.
9. Prepare the CSR Report: Complete the prescribed format; annex to the Board’s Report; obtain chairperson/director signature.
10. File and disclose: File the annual return with CSR annexure; update website disclosures; retain documentation for audit.

For companies looking to understand broader corporate services and compliance frameworks, these obligations sit alongside annual statutory filings and governance disclosures required under the Companies Act.

Conclusion and Key Takeaways

The minimum CSR spending requirement in India remains anchored at 2% of average net profit under Section 135 of the Companies Act, 2013, but the compliance landscape around it is growing steadily more intricate. The interplay between CSR obligations and the Social Stock Exchange framework, the tighter enforcement posture adopted by the MCA, and the documentation requirements for set-off of excess spending all demand that boards and compliance officers treat CSR not as a peripheral obligation but as a core governance function.

Three immediate action items for compliance teams:

• Recalculate the 2% threshold for FY 2026–27 using audited standalone financials and Section 198 methodology, do not rely on management accounts.
• Review all implementing agencies for current CSR-1 registration on the MCA portal before disbursing any CSR funds.
• Document the Board’s position on SSE instrument contributions explicitly in minutes, including Schedule VII mapping and CSR-1 status of the social enterprise.

For companies seeking specialist guidance on CSR structuring, regulatory filings, or board governance obligations, the Global Law Experts lawyer directory connects you with experienced corporate practitioners across India.

Sources

1. Ministry of Corporate Affairs (MCA), Official Notifications and Circulars
2. Companies Act, 2013, Section 135 (Legislative Department, Government of India)
3. CA2013.com, Section 135 Corporate Social Responsibility Summary
4. Ministry of Coal, CSR Frequently Asked Questions
5. Securities and Exchange Board of India (SEBI), Social Stock Exchange Guidance
6. India Briefing, Corporate Social Responsibility in India
7. ClearTax, Corporate Social Responsibility Guide
8. UNESCO, Mandatory Corporate Social Responsibility (CSR) in India