Economic and Business Environment · Elements of Corporate Governance

Corporate Social Responsibility under Section 135 Explained

Updated 11 October 2026 · Fact-checked

Section 135 of the Companies Act, 2013 requires 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 to set up a CSR Committee, adopt a CSR Policy and spend at least 2% of its average net profit of the three preceding financial years on CSR.

Understand Corporate Social Responsibility (Section 135)

Corporate Social Responsibility (CSR) means a company gives back to society, not only profit to its owners. In India this is a legal duty for larger companies, not just a choice. Section 135 of the Companies Act, 2013 sets the rules.

First, ask whether the company is covered. The test is in the immediately preceding financial year. If the company had net worth of ₹500 crore or more, or turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more, Section 135 applies. Meeting any one of the three is enough.

Next, the machinery. The Board must constitute a CSR Committee of three or more directors, with at least one independent director. The Committee frames a CSR Policy showing the activities to be done (from areas in Schedule VII), recommends the amount to be spent and monitors the policy. The Board approves the policy, puts it on the company's website if it has one, and makes sure the activities are carried out.

Then the money. The company must spend, in every financial year, at least 2% of the average net profits of the three immediately preceding financial years. Preference goes to the local area and areas around where the company operates. If the company is new and has not completed three years, the preceding years it has completed are used.

Finally, unspent money. If the amount is not spent, the Board must give reasons in its report. Money for an ongoing project goes to a special Unspent CSR Account. Other unspent money goes to a Schedule VII Fund. Default attracts penalties.

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 condition is enough. Net profit is calculated as per section 198.
Minimum CSR spend: CSR spend = 2% × average net profit of the 3 immediately preceding financial years; Add the three years' net profits, divide by 3, then take 2%. If the company is under three years old, use the preceding years completed.
CSR Committee composition: Minimum 3 directors, including at least 1 independent director; If the company need not appoint an independent director under section 149(4), it needs 2 or more directors.
Small CSR amount exemption: CSR amount ≤ ₹50 lakh → no Committee; Board performs its functions; Section 135(9). The spending duty still remains.
Unspent amount, ongoing project: Transfer to Unspent CSR Account within 30 days of financial year end; spend within 3 financial years from transfer; If not spent, transfer to a Schedule VII Fund within 30 days of completing the third financial year.
Unspent amount, other than ongoing project: Transfer to a Schedule VII Fund within 6 months of the expiry of the financial year; The Board must also give reasons in its report.
Penalty for default: Company: lower of 2 × amount not transferred or ₹1 crore. Officer in default: lower of 1/10 of that amount or ₹2 lakh; Applies to default under sub-sections (5) or (6).

How to solve Corporate Social Responsibility (Section 135) questions

Use this order for any Section 135 question, whether it is theory or a short calculation.

1Read the question and note what is asked: applicability, Committee, policy, spending amount or unspent money.
2For applicability, check the three limits (net worth, turnover, net profit) for the immediately preceding financial year. One is enough.
3For the Committee, state the minimum members (three directors, one independent) and the three functions: recommend policy, recommend amount, monitor.
4For spending, compute the average of the three preceding years' net profits, then take 2%. Show each step.
5For unspent money, decide first whether it relates to an ongoing project. That decides the account or Fund and the time limit.
6Add the penalty or the Board's reporting duty if the question mentions default or failure.
7Close with a one-line conclusion that answers the question directly.

Quickest way: Three-question check

When to use it: Use it for MCQs and short-answer questions where time is tight.

Who is covered? Think 500 / 1,000 / 5: crore for net worth, turnover, net profit. Any one.
How much? 2% of the average of the last three years' net profit.
What if unspent? Ongoing project: special account, 30 days. Otherwise: Schedule VII Fund, six months.
Recall the Committee as 3 directors with 1 independent, and the ₹50 lakh rule where the Board acts instead.

Common mistakes in Corporate Social Responsibility (Section 135)

Saying all three conditions must be met for CSR to apply.
The three limits are listed together, so students read them as 'and'.
Fix: Remember the word 'or'. Meeting any one of net worth, turnover or net profit triggers Section 135.
Taking 2% of the current year's profit.
It feels natural to use the latest year.
Fix: Always use the average of the three immediately preceding financial years.
Dividing the three-year total by the wrong number or including a loss year wrongly.
Students rush and skip the averaging step.
Fix: Add the three figures (a loss year is a negative figure in the total), then divide by 3. Write each step.
Mixing up the two unspent routes and their time limits.
Both involve transfer and time limits, so they blur.
Fix: Ask if the amount relates to an ongoing project. Yes: Unspent CSR Account within 30 days. No: Schedule VII Fund within six months.
Thinking a company with CSR amount up to ₹50 lakh need not spend.
The exemption word 'not applicable' is misread.
Fix: Only the Committee is dispensed with. The Board discharges its functions and the 2% duty remains.
Stating the penalty as a flat ₹1 crore.
Students remember only the ceiling.
Fix: The company pays the lower of twice the amount and ₹1 crore. The officer pays the lower of one-tenth and ₹2 lakh.

Worked examples

Example 1

Arjun Textiles Ltd had net profits of ₹12 crore, ₹9 crore and ₹15 crore in the three immediately preceding financial years. Its turnover and net worth were below the limits in Section 135, but the net profit in the immediately preceding year was ₹15 crore. Is CSR applicable, and what is the minimum CSR spend?

Show the solution

Applicability: net profit of the immediately preceding year is ₹15 crore, which is more than ₹5 crore. One condition is met, so Section 135 applies.
Average net profit = (12 + 9 + 15) ÷ 3 = 36 ÷ 3 = ₹12 crore.
Minimum CSR spend = 2% of ₹12 crore = ₹0.24 crore = ₹24 lakh.
The CSR amount of ₹24 lakh does not exceed ₹50 lakh, so the CSR Committee need not be constituted. The Board discharges its functions.

Answer: CSR applies. The minimum spend is ₹24 lakh, and the Board may perform the Committee's functions because the amount does not exceed ₹50 lakh.

Example 2

Explain the composition and functions of the CSR Committee and what happens if a company fails to spend its CSR amount in a year.

Show the solution

Composition: the Board constitutes a Committee of three or more directors, with at least one independent director. A company not required to appoint an independent director under section 149(4) needs two or more directors. The Board's report discloses the composition.
Functions: the Committee formulates and recommends to the Board a CSR Policy showing activities from Schedule VII, recommends the amount to be spent, and monitors the policy from time to time.
Board's role: it approves the policy after considering the recommendations, discloses it in its report, places it on the website if any, and ensures the activities are undertaken.
Failure to spend: the Board states the reasons in its report.
If the unspent amount relates to an ongoing project, it is transferred within 30 days of the financial year end to the Unspent CSR Account in a scheduled bank and spent within three financial years. Otherwise it goes to a Schedule VII Fund, within six months of the expiry of the financial year.
Default in these duties attracts a penalty on the company and its officers in default.

Answer: The Committee has at least three directors including one independent director. It recommends the policy and amount and monitors the policy. Unspent money goes to the Unspent CSR Account (ongoing projects) or a Schedule VII Fund, with reasons given in the Board's report.

Exam tips

In written answers, structure your reply as applicability, Committee, policy, spending, unspent amount. It earns marks for completeness.
In calculations, show the average step separately before taking 2%. Marks are often given for the method.
For MCQs, watch for traps on 'and' versus 'or' in the thresholds, and on current-year versus three-year average.
Learn the two unspent-money routes as a pair, with their time limits (30 days and six months).
Link this topic to Schedule VII and Board Committees in your revision, because questions often combine them.

Practice questions from Elements of Corporate Governance

Corporate Social Responsibility (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.

Corporate Social Responsibility (Section 135): frequently asked questions

Who must comply with Section 135 of the Companies Act, 2013?

A company that had 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 do I calculate the 2% CSR spend?

Take the net profits of the three immediately preceding financial years, add them and divide by three. Then take 2% of that average. Net profit is calculated as per section 198.

Is a CSR Committee always required?

No. If the amount to be spent does not exceed ₹50 lakh, the Committee need not be formed and the Board of Directors performs its functions. The duty to spend remains.

What happens to unspent CSR money?

For an ongoing project, it goes to an Unspent CSR Account within 30 days of the financial year end and must be spent within three financial years. Otherwise it goes to a Fund in Schedule VII within six months of the year's expiry.

Can excess CSR spending be carried forward?

Yes. If a company spends more than required, it may set off the excess against the requirement for succeeding financial years, in the manner and for the number of years prescribed.