Corporate and Economic Laws · Corporate Governance and Social Responsibility and Sustainability

Applicability of CSR under Section 135 of the Companies Act

Updated 11 October 2026 · Fact-checked

Section 135 applies to a company that, in the immediately preceding financial year, had net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. Meeting any one test is enough. Check the three limits, then apply the 2% spend rule and the committee rule.

Understand Applicability of CSR under Section 135

Corporate Social Responsibility (CSR) is a legal duty for larger companies under Section 135 of the Companies Act, 2013. The law does not ask every company to spend on social causes. It picks out companies by size and profit.

The section sets three thresholds: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. The test is applied on the figures of the immediately preceding financial year. The three tests are alternatives. If the company crosses even one, Section 135 applies.

Once Section 135 applies, the company must constitute a CSR Committee of the Board with three or more directors, at least one of them independent. A company that is not required to appoint an independent director under section 149(4) needs two or more directors on the committee. The Board's report must disclose the committee's composition.

The Board must then ensure that the company spends, every financial year, at least 2% of the average net profits of the three immediately preceding financial years. If the company has not completed three financial years since incorporation, the average is taken over the immediately preceding years it has. Net profit is calculated as per section 198, and certain prescribed sums are excluded.

There is a relief for small CSR obligations. If the amount to be spent does not exceed ₹50 lakh, the company need not constitute the committee. The Board of Directors then discharges the committee's functions.

Key rules to remember

Applicability test: Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore (in the immediately preceding financial year); Any one condition is enough. These are alternatives, not cumulative.
Minimum CSR spend: CSR spend ≥ 2% × average net profit of the three immediately preceding financial years; If the company is under three financial years old, use the immediately preceding years it has. Net profit is computed under section 198.
CSR Committee composition: 3 or more directors, including at least 1 independent director; Where no independent director is required under section 149(4), 2 or more directors are enough.
Committee exemption: If CSR amount ≤ ₹50 lakh, no committee is needed; the Board performs its functions; The CSR obligation itself still remains.

How to solve Applicability of CSR under Section 135 questions

Use the same sequence for any question on whether and how much a company must spend on CSR.

1Identify the immediately preceding financial year. All three threshold tests use that year's figures.
2Test net worth against ₹500 crore, turnover against ₹1,000 crore and net profit against ₹5 crore. Use 'or', not 'and'.
3If none is met, state that Section 135 does not apply in that year and stop.
4If any one is met, state that the company must constitute a CSR Committee and comply with Section 135.
5Compute the average net profit of the three immediately preceding financial years, as per section 198, and take 2% of it.
6Compare the 2% amount with ₹50 lakh to decide whether the committee can be dispensed with and the Board can act.
7Check the committee composition: three directors with one independent, or two directors if no independent director is required.
8Conclude with the amount, the committee position and any consequence of default.

Quickest way: Three-limit scan, then 2% of the three-year average

When to use it: Use this for MCQs and short case questions where figures for several years are given.

Underline the preceding year's net worth, turnover and net profit.
Tick the first limit that is met. One tick is enough.
Ignore the current year's figures for applicability.
Average the last three years' net profit and take 2%.
If that amount is ₹50 lakh or less, say the Board performs the committee's functions.

Common mistakes in Applicability of CSR under Section 135

Requiring all three thresholds to be met.
Students read the three limits as a combined test.
Fix: Remember the text uses 'or'. Meeting any one of net worth, turnover or net profit triggers Section 135.
Using current year figures to test applicability.
The current year feels more relevant.
Fix: The law refers to the immediately preceding financial year. Use that year for the threshold test.
Taking 2% of only last year's profit.
Students mix the applicability test with the spending formula.
Fix: The spend is 2% of the average net profit of the three immediately preceding financial years.
Saying a company with CSR of ₹40 lakh is free from CSR.
Confusing the committee exemption with an exemption from spending.
Fix: Only the committee is dispensed with. The Board discharges its functions and the 2% spend remains.
Always requiring three directors with an independent director on the committee.
Students overlook the proviso.
Fix: Where a company need not appoint an independent director under section 149(4), two or more directors suffice.
Computing net profit from the profit and loss account without adjustment.
Accounting profit looks like the obvious base.
Fix: Net profit is calculated as per section 198, and prescribed sums are excluded. Use the figure the question gives as CSR net profit.

Worked examples

Example 1

Shakti Textiles Ltd had, in the immediately preceding financial year, net worth of ₹320 crore, turnover of ₹1,150 crore and net profit of ₹3 crore. Is Section 135 applicable?

Show the solution

Net worth ₹320 crore is below ₹500 crore, so this test is not met.
Turnover ₹1,150 crore is at least ₹1,000 crore, so this test is met.
Net profit ₹3 crore is below ₹5 crore, so this test is not met.
Only one test is needed, as the tests are alternatives.

Answer: Section 135 applies because turnover is ₹1,000 crore or more. The company must constitute a CSR Committee.

Example 2

Kaveri Foods Ltd is covered by Section 135. Its net profits under section 198 for the three immediately preceding financial years were ₹12 crore, ₹18 crore and ₹15 crore. Find the minimum CSR spend and state whether the CSR Committee is mandatory.

Show the solution

Average net profit = (12 + 18 + 15) ÷ 3 = 45 ÷ 3 = ₹15 crore.
Minimum CSR spend = 2% × ₹15 crore = ₹0.30 crore = ₹30 lakh.
₹30 lakh does not exceed ₹50 lakh.
So the requirement to constitute a CSR Committee does not apply, and the Board discharges its functions.

Answer: Minimum CSR spend is ₹30 lakh. No CSR Committee is needed, as the amount is not above ₹50 lakh. The Board performs the committee's functions and the company must still spend the ₹30 lakh.

Exam tips

In MCQs, watch for options that use 'and' instead of 'or' for the three thresholds. They are wrong.
In case scenarios, find the preceding year's figures first and ignore the current year for applicability.
Always compute the three-year average before taking 2%. Show the average line, as it earns marks.
Mention the ₹50 lakh committee relief whenever the computed CSR amount is small.
Quote the committee composition with the proviso: two or more directors where no independent director is required.

Practice questions from Corporate Governance and Social Responsibility and Sustainability

Applicability of CSR under Section 135 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Applicability of CSR under Section 135: frequently asked questions

Which companies must comply with CSR under Section 135?

A company with net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the immediately preceding financial year. Any one condition is enough.

How much must a company spend on CSR?

At least 2% of the average net profits made during the three immediately preceding financial years. If the company is less than three financial years old, the immediately preceding years it has completed are used. Net profit is computed under section 198.

Does a company with a small CSR obligation need a CSR Committee?

If the amount to be spent does not exceed ₹50 lakh, the committee need not be constituted. The Board of Directors discharges the committee's functions. The spending duty stays.

What happens if a company does not spend the required CSR amount?

The Board must give the reasons in its report. Unless the amount relates to an ongoing project, the unspent amount is transferred to a Schedule VII Fund within six months of the end of the financial year. Ongoing project amounts go to the Unspent CSR Account within thirty days. Default attracts a penalty under sub-section (7).