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CSR and Social Governance · Guidelines on CSR

Section 135 and Applicability of CSR Under the Companies Act

Updated 11 October 2026 · Fact-checked

Section 135 applies to every 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. Net profit is computed under section 198.

Understand Section 135 and Applicability of CSR

Corporate Social Responsibility (CSR) is a legal duty for larger companies under section 135 of the Companies Act, 2013. Not every company has it. The law uses size tests so that only companies with real financial strength must spend on social causes.

There are three tests: net worth, turnover and net profit. A company is covered if it crosses any one of them. It does not need to cross all three. The tests are checked on the figures of the immediately preceding financial year, so you look at last year's accounts to decide this year's position.

The thresholds are: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. Note the words "or more". A company with exactly ₹5 crore net profit is covered.

Net profit has a special meaning. The Explanation to section 135 says it is calculated in accordance with section 198, and it does not include such sums as may be prescribed. Section 198 tells you what to add and what to leave out. For example, profits of a capital nature, profits from sale of fixed assets (subject to the proviso), and unrealised or notional gains are not credited. Items such as usual working charges, directors' remuneration, interest and depreciation to the extent specified in section 123 are deducted. Income-tax is not deducted.

Once a company is covered, it must constitute a CSR Committee of three or more directors, including at least one independent director. Where a company need not appoint an independent director under section 149(4), two or more directors are enough. Where the CSR amount to be spent does not exceed ₹50 lakh, no Committee is needed and the Board performs its functions (section 135(9)).

Key rules to remember

Applicability test
Net worth ≥ ₹500 crore OR Turnover ≥ ₹1,000 crore OR Net profit ≥ ₹5 crore (immediately preceding financial year)
Any one test is enough. Use the preceding year's figures.
Net profit for CSR
Net profit as per section 198, excluding sums prescribed
Do not simply take profit before or after tax from the P&L account. Apply section 198 adjustments.
Minimum CSR spend
2% × average net profit of the three immediately preceding financial years
If the company is under three years old, use the immediately preceding years since incorporation.
CSR Committee size
At least 3 directors, with at least 1 independent director
Where no independent director is required under section 149(4), at least 2 directors.
Committee exemption
Amount to be spent ≤ ₹50 lakh → no Committee; Board discharges its functions
Section 135(9).

How to solve Section 135 and Applicability of CSR questions

Use this order for any applicability question. It keeps the analysis clean and shows the examiner a clear provision, facts and conclusion.

  1. 1State the rule: section 135(1) applies on net worth ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more.
  2. 2Fix the test year: the immediately preceding financial year.
  3. 3List the figures given for that year. Check each test separately.
  4. 4If net profit is in doubt, recompute it under section 198: add or leave out credits (section 198(3)), deduct items in 198(4), and do not deduct items in 198(5), such as income-tax.
  5. 5Conclude: covered if any one test is met, with the reason.
  6. 6If covered, state consequences: CSR Committee (or Board if spend is up to ₹50 lakh), policy, 2% spend on the three-year average net profit.

Quickest way: Any-one-test scan

When to use it: Use when the question gives a table of figures and asks whether section 135 applies.

  1. Write 500 / 1,000 / 5 (crore) as a checklist.
  2. Tick the first test the company meets and stop.
  3. Only if the question hints at one-off gains, tax or capital items, recompute net profit under section 198.
  4. Write the conclusion in one line naming the test met.

Common mistakes in Section 135 and Applicability of CSR

  • Requiring all three tests to be met

    Students read the thresholds as a combined condition.

    Fix: Remember the word "or". One test is enough.

  • Using current year figures

    The question is set in the current year, so students pick its numbers.

    Fix: Section 135(1) refers to the immediately preceding financial year.

  • Using profit before tax as net profit without adjustment

    Students skip section 198.

    Fix: Remove capital profits, notional or unrealised gains and similar credits, and do not deduct income-tax. Then compare with ₹5 crore.

  • Treating the 2% spend as 2% of the current year's profit

    The applicability test uses one year, so students assume the spend does too.

    Fix: The spend is 2% of the average net profit of the three immediately preceding financial years.

  • Saying every covered company needs a three-member Committee

    Students miss section 135(9) and the proviso to 135(1).

    Fix: If the amount to be spent is up to ₹50 lakh, the Board performs the Committee's functions. Without an independent director requirement, two directors suffice.

  • Treating the ₹5 crore threshold as 'more than'

    Loose reading of the section.

    Fix: The section says 'or more', so exactly ₹5 crore qualifies.

Worked examples

Example 1

Sundaram Textiles Ltd had, in the immediately preceding financial year, net worth of ₹320 crore, turnover of ₹870 crore and net profit (as per section 198) of ₹5.4 crore. Is section 135 applicable?

Show the solution
  1. Rule: section 135(1) applies if net worth is ₹500 crore or more, or turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the immediately preceding financial year.
  2. Net worth ₹320 crore is below ₹500 crore: not met.
  3. Turnover ₹870 crore is below ₹1,000 crore: not met.
  4. Net profit ₹5.4 crore is at least ₹5 crore: met.
  5. Any one test is enough.

Answer: Section 135 applies because the net profit test is met. The company must constitute a CSR Committee, or the Board acts as the Committee if the amount to be spent does not exceed ₹50 lakh.

Example 2

Kaveri Industries Ltd shows profit of ₹6 crore before tax in the preceding year. This includes ₹2.5 crore profit on sale of a factory building (fixed asset of a capital nature; the company does not deal in such property). The building had an original cost of ₹7 crore and a written-down value of ₹6 crore, and was sold for ₹8.5 crore. Net worth is ₹200 crore and turnover ₹400 crore. Ignore other adjustments. Is section 135 applicable?

Show the solution
  1. Net worth ₹200 crore and turnover ₹400 crore are below the thresholds.
  2. Only the net profit test can apply. Net profit must be computed under section 198.
  3. Section 198(3)(d) denies credit for profit from the sale of a fixed asset of a capital nature, unless the company deals in such assets. It does not here.
  4. The proviso to (d) applies because the sale price (₹8.5 crore) exceeds the written-down value (₹6 crore). Credit is given for the excess of sale price over WDV, but only up to the difference between original cost and WDV.
  5. Excess of sale price over WDV = ₹8.5 crore − ₹6 crore = ₹2.5 crore. Difference between original cost and WDV = ₹7 crore − ₹6 crore = ₹1 crore.
  6. Credit allowed = lower of ₹2.5 crore and ₹1 crore = ₹1 crore. Credit denied = ₹2.5 crore − ₹1 crore = ₹1.5 crore.
  7. Adjusted profit = ₹6 crore − ₹1.5 crore = ₹4.5 crore.
  8. Income-tax is not deducted under section 198(5)(a), so no further tax adjustment.
  9. ₹4.5 crore is below ₹5 crore.

Answer: No test is met, so section 135 does not apply to Kaveri Industries Ltd for the following year on these figures.

Exam tips

  • Always name the test year as the immediately preceding financial year. Examiners look for this.
  • If the facts include a one-time sale of an asset or an unrealised gain, the question is almost certainly testing section 198. Recompute net profit.
  • Write the three thresholds with 'or more' wording and the 'any one test' conclusion.
  • After the applicability conclusion, add one line on the Committee and the ₹50 lakh Board exception. It shows depth.
  • Keep the structure: provision, facts, conclusion.

Practice questions from Guidelines on CSR

Section 135 and Applicability of CSR in other exams

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

Section 135 and Applicability of CSR: frequently asked questions

Does a company need to meet all three tests for section 135 to apply?

No. Meeting any one of net worth ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more is enough. The figures are for the immediately preceding financial year.

How is net profit calculated for CSR?

The Explanation to section 135 says net profit is calculated in accordance with section 198 and excludes prescribed sums. Section 198 gives credit for some items, denies credit for others such as capital profits and unrealised gains, and lists deductions and non-deductions, such as income-tax.

Is a CSR Committee always required?

No. If the amount to be spent under section 135(5) does not exceed ₹50 lakh, the Committee need not be constituted and the Board discharges its functions. Otherwise the Committee needs three or more directors with at least one independent director, subject to the proviso for companies not required to appoint one.

How much must a covered company spend on CSR?

At least 2% of the average net profit made during the three immediately preceding financial years. A company younger than three years uses the immediately preceding years since incorporation.