A company crosses ₹5 crore in net profit for the first time after a strong year. The team celebrates the milestone and entirely misses that it has just walked into the CSR net. From the next financial year it must spend 2% of average profits on eligible activities, set up the governance for it, and report it — and since 2021 under-spending is a penalty rather than an explanation.
CSR applies to any company crossing any one of three thresholds — net worth ₹500 crore, turnover ₹1,000 crore, or net profit ₹5 crore in the preceding year — and requires spending 2% of the three-year average net profit on Schedule VII activities.
The bottom line
Applies if: net worth ≥ ₹500 crore, or turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore in the immediately preceding financial year.
Spend: at least 2% of the average net profit of the three preceding financial years, on Schedule VII activities.
Unspent: transfer to an Unspent CSR Account within 30 days for ongoing projects, or to a Schedule VII fund within 6 months for anything else. Failure means a penalty of twice the unspent amount or ₹1 crore, whichever is less.
What triggers CSR
Section 135(1) applies to any company — private, public, OPC, Section 8, or a foreign company with a branch or project office in India — that meets any one of the three thresholds in the immediately preceding financial year.
Applicability is assessed annually, so a company moves in and out of the net as its numbers cross the line. One good year pulls you in for the next.
There is a change worth tracking. The Corporate Laws (Amendment) Bill, 2026 proposes raising the net profit threshold from ₹5 crore to ₹10 crore, leaving net worth and turnover unchanged, which would lift tens of thousands of mid-sized companies out of mandatory CSR. Until it receives assent and is notified, the ₹5 crore threshold still applies. Acting on the proposal early is not planning, it is a default.
How much you must spend
Section 135(5) sets it at two per cent of the average net profits of the three immediately preceding financial years, computed under Section 198 — which, notably, excludes profits from overseas branches. A company that has not completed three years averages over the years since incorporation.
The money goes to activities listed in Schedule VII: education, health, gender equality, environment and the rest. The activity must not be part of the company's normal course of business, which rules out counting your own product giveaways as CSR.
The committee, and the exemption most companies get
A CSR Committee is three or more directors including at least one independent director, with relaxations where an independent director is not required — a private company with two directors forms a committee of two. The committee frames the CSR policy and annual action plan and monitors spending.
Section 135(9) then removes the overhead for most newly-in-scope companies. Where the amount to be spent in a year does not exceed ₹50 lakh, no separate CSR Committee is required and the Board discharges its functions. Given the arithmetic of the thresholds, most companies entering the net for the first time sit under ₹50 lakh.
Unspent money
Under-spending stopped being a comply-or-explain matter in 2021. Any unspent amount must move.
For an ongoing project, transfer the unspent amount to a dedicated Unspent CSR Account within 30 days of the financial year end, and spend it within the next three years.
For anything not ongoing, transfer to a Schedule VII fund, such as PM CARES or the PM National Relief Fund, within 6 months of the year end.
CSR-1, CSR-2 and reporting
Two forms anchor the compliance. CSR-1 registers the implementing agency — the NGO or trust executing the project — on the MCA portal, and you cannot route funds through an unregistered agency. CSR-2 is the annual CSR report, filed as an addendum to AOC-4. The Board's Report carries a CSR annual report as well.
Companies with an average CSR obligation of ₹10 crore or more must additionally commission an independent impact assessment of larger projects.
What non-compliance costs
Under Section 135(7), failing to transfer the unspent amount makes the company liable to twice the unspent amount or ₹1 crore, whichever is less, and every officer in default to one-tenth of the unspent amount or ₹2 lakh, whichever is less.
It is a civil penalty, which means it is quick to adjudicate and tied directly to money the company did not deploy. There is no argument about intent to be had.
A worked example
A company posts net profits of ₹3 crore, ₹7 crore and ₹11 crore over three years. The latest figure crosses the ₹5 crore line, so CSR applies the following year.
The obligation is 2% of the three-year average of ₹7 crore, which is ₹14 lakh. Because ₹14 lakh is under ₹50 lakh, no separate committee is needed and the Board runs it. The company funds a Schedule VII digital literacy project through a CSR-1-registered NGO, spends the full ₹14 lakh, and reports it in CSR-2 and the Board's Report.
Had it spent only ₹8 lakh on a non-ongoing project, the unspent ₹6 lakh would go to a Schedule VII fund within 6 months. Miss that and the penalty is up to ₹12 lakh, twice the shortfall — nearly the whole year's obligation again.
Common mistakes
- Treating CSR as voluntary. Since 2021 it is comply or pay, with penalties tied to the unspent amount.
- Acting on the ₹10 crore proposal early. It is not law, and the ₹5 crore threshold still applies.
- Routing funds through an unregistered agency. The implementing NGO needs a CSR-1 registration.
- Missing the transfer deadlines of 30 days for ongoing projects or 6 months for the rest.
- Counting normal-course activities as CSR. It must be a Schedule VII project outside your regular business.
A working routine
- Test applicability each year against the three thresholds, on the preceding financial year.
- Compute 2% of the three-year average net profit on the Section 198 basis.
- Form a CSR Committee, or let the Board discharge the function where the spend is ₹50 lakh or less.
- Approve a CSR policy and annual action plan, and use CSR-1-registered implementing agencies.
- Spend within the year, and transfer anything unspent on time.
- File CSR-2 with AOC-4, report in the Board's Report, and run an impact assessment where the obligation is ₹10 crore or more.
Frequently asked questions
Who has to comply with CSR? Any company meeting net worth of ₹500 crore, turnover of ₹1,000 crore, or net profit of ₹5 crore in the preceding financial year.
How much must be spent? At least 2% of the average net profit of the three preceding financial years, on Schedule VII activities.
Is a CSR Committee always required? No. Where the annual CSR amount is ₹50 lakh or less, the Board discharges the committee's functions.
What happens to unspent CSR money? For ongoing projects, into an Unspent CSR Account within 30 days. Otherwise, to a Schedule VII fund within 6 months.
What is the penalty for not transferring unspent CSR? For the company, twice the unspent amount or ₹1 crore, whichever is less. For officers, one-tenth or ₹2 lakh, whichever is less.
Has the ₹5 crore threshold changed? Not yet. The Corporate Laws (Amendment) Bill, 2026 proposes ₹10 crore, and until it is assented to and notified the ₹5 crore figure governs.
Primary sources
- Section 135, including 135(1), (5), (6), (7) and (9), and Section 198, Companies Act, 2013
- Companies (CSR Policy) Rules, 2014 as amended in 2021, and Schedule VII
- Forms CSR-1 and CSR-2; Corporate Laws (Amendment) Bill, 2026 — a proposal, not yet law