CSR Law for the Social Sector
A plain-English guide to Section 135 of the Companies Act, 2013 and the CSR Rules: what companies must spend, and what NGOs must do to receive it.
Why CSR became real money with real rules
Section 135 of the Companies Act, 2013 requires every qualifying company to adopt a CSR policy and to spend at least 2% of its average net profits on activities listed in Schedule VII of the Act. A company whose CSR amount is more than ₹50 lakh must also constitute a CSR committee. Company filings on the MCA21 registry show CSR expenditure of ₹34,908.75 crore for FY 2023-24, and over ₹1,44,159 crore across the five years from FY 2019-20.
Until 2021 the regime was "comply or explain", which meant a company could skip spending if its board explained why. The changes in force from 22 January 2021 ended that: unspent money must now be moved to the Unspent CSR Account or to a Schedule VII fund by a fixed date, and a company that misses the date is liable to a penalty. Companies now work to an annual action plan that the CSR Committee recommends to the board (Rule 5(2)).
The law in six points
- Who must spend. 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 (section 135(1)). It must then spend at least 2% of its average net profit for the three preceding financial years, or for the years since incorporation if there are fewer (section 135(5)). Under Rule 2(1)(h), net profit is taken from the company's financial statements and leaves out profit from overseas branches and dividends from other Indian companies that are themselves covered by section 135. The net-profit test reaches many mid-sized companies that do not think of themselves as CSR spenders. The Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026, introduced in the Lok Sabha on 23 March 2026) would raise the net-profit figure to ₹10 crore or such sum as may be prescribed. It would also raise the ₹50 lakh figure in section 135(9) to ₹1 crore or a higher prescribed amount and extend the 30-day transfer period in section 135(6) to 90 days. A Joint Committee presented its report on 3 August 2026. The Bill had not become law when this page was last checked on 4 October 2026.
- What counts. Only activities within Schedule VII: eradicating hunger and poverty, health and sanitation, education, gender equality, environment, heritage, sports, armed-forces veterans' welfare, contributions to funds such as the Prime Minister's National Relief Fund and the PM CARES Fund, incubators and R&D, rural and slum development, disaster relief and, since 27 May 2026, subscription to zero coupon zero principal instruments on a Social Stock Exchange (item (xiii)). Interpreted liberally, but activities in the "normal course of business," activities that benefit the company's employees, contributions to political parties, sponsorships that bring the company marketing benefit, activities carried out to meet another statutory obligation under Indian law, and activities outside India (except training Indian sports personnel) are excluded (Rule 2(1)(d)).
- How it can be spent. Directly by the company, or through an implementing agency listed in Rule 4(1): a Section 8 company, registered public trust or registered society that the company set up, alone or with others; one set up by the Central or a State Government; a statutory body created by an Act of Parliament or a State legislature; or any other Section 8 company, registered public trust or registered society with a track record of at least three years in similar activities. The company-established bodies and the bodies with a three-year track record must be exempt under section 10(23C) or registered under section 12A and approved under section 80G of the Income-tax Act, 1961. Every agency must also obtain a CSR registration number by filing Form CSR-1 (Rule 4(2)). Since 27 May 2026 a company may also put up to 10% of a year's CSR spending into zero coupon zero principal instruments issued by a not-for-profit organisation registered on a Social Stock Exchange (Rule 4A).
- Unspent money has a destination. Money left unspent on an "ongoing project" (a multi-year project with timelines of up to three years, not counting the year it starts) must be moved to a special Unspent CSR Account in a scheduled bank within 30 days of the end of the financial year. The company then has three financial years from the date of transfer to spend it, and whatever is still unspent goes to a Schedule VII fund within 30 days from the date of completion of the third financial year (section 135(6)). Any other unspent amount goes to a Schedule VII fund within six months of the end of the financial year (section 135(5)). A company that misses these dates is liable to a penalty of twice the amount it should have transferred or ₹1 crore, whichever is less. Each officer in default is liable to one-tenth of the amount that should have been transferred or ₹2 lakh, whichever is less (section 135(7)).
- Impact assessment is sometimes compulsory. A company whose average CSR obligation over the three preceding financial years is ₹10 crore or more must have an independent agency assess each of its CSR projects with an outlay of ₹1 crore or more that was completed at least one year earlier (Rule 8(3)). The reports go to the Board and are annexed to the annual CSR report. Implementing NGOs that already collect baseline and outcome data make that assessment easier.
- Surplus and capital assets are regulated. A surplus from CSR activities (the MCA's FAQs give interest earned on CSR funds, project revenue and sale of materials as examples) is not business profit. It must be ploughed back into the same project, or moved to the Unspent CSR Account and spent under the company's CSR policy and annual action plan, or sent to a Schedule VII fund within six months of the end of the financial year (Rule 7(2)). A capital asset bought with CSR money must be held by a Section 8 company, registered public trust or registered society that has charitable objects and a CSR registration number, by the project's beneficiaries (as self-help groups, collectives or entities), or by a public authority (Rule 7(4)). The funding company does not hold it.
Who's who in a CSR transaction
Owns the legal duty: board-approved policy, annual action plan, spending, disclosure in the board's report and on its website, and Form CSR-2 filing. Its board must satisfy itself that funds were used as approved, and its Chief Financial Officer certifies this (Rule 4(5)).
Board committee of three or more directors, at least one of them independent (two or more directors where the company need not appoint an independent director). It recommends the CSR policy and the amount to be spent, and monitors the policy (section 135(1), (3)). A company whose CSR amount does not exceed ₹50 lakh need not form the committee, and its board performs the committee's functions (section 135(9)). A company with money in an Unspent CSR Account must still form the committee (Rule 3(1)).
An agency listed in Rule 4(1): a Section 8 company, registered public trust or registered society (with 12A and 80G, or a section 10(23C) exemption, unless a Government set it up), or a statutory body. Each needs a CSR registration number (Form CSR-1). If neither the company nor a Government established it, it needs an established track record of at least three years in similar activities (Rule 4(1)(d)). It runs the project and reports utilisation to the company.
An independent agency commissioned by large CSR spenders to assess completed big-ticket projects. Their reports are placed before the board and annexed to the CSR annual report.
NGO readiness checklist
What a company's diligence team will look for before releasing CSR funds, and what the Rules require of you.
Grey areas practitioners argue about
The Rules cap the company's "administrative overheads" at 5% of its total CSR spend for the year (Rule 7(1)). The Rules define the term as the company's expenses for the general management and administration of its CSR functions, and exclude money spent directly on designing, implementing, monitoring and evaluating a project (Rule 2(1)(b)). The MCA's FAQs add that an implementing agency's costs of managing CSR activities are not the company's administrative overheads. In practice many companies push the 5% frame onto NGO budgets anyway. Negotiate cost lines as direct project costs (project staff, M&E, field logistics) with the Rules in hand.
The unspent-funds rules are more forgiving for multi-year "ongoing projects" (three financial years to spend, after a transfer within 30 days) than for everything else (six months). Companies therefore structure programmes as ongoing projects. The definition covers a project approved as multi-year and also a project first approved as a single-year project whose duration the board later extends beyond one year on reasonable justification (Rule 2(1)(i)). A project relabelled in March needs that justification from the board.
Training farmers a company buys from, or running schools near a plant, can drift towards business benefit. Rule 2(1)(d)(i) excludes activities undertaken in the normal course of business, and Rule 2 does not define that phrase. The MCA describes CSR oversight as disclosure based, with certification of CSR expenditure by the Chief Financial Officer and audit by the statutory auditors, so expect questions where the CSR project and the business overlap.
Money from an Indian company is normally a domestic donation. It is foreign contribution if the company is itself a "foreign source" under section 2(1)(j)(vi) of the FCRA, which means that more than half the nominal value of its share capital is held, singly or together, by foreign governments, foreign citizens, foreign corporations, foreign trusts, societies or associations, or a foreign company. A proviso to that sub-clause says the company is not a foreign source where its foreign investment is within the limits set under the Foreign Exchange Management Act, 1999 and the rules and regulations made under it. If the funder is a foreign source, the NGO needs FCRA registration or prior permission to accept the money. Ask the funder to confirm its status in writing.
Frequently asked questions
Can a company give CSR money to any NGO it likes?
Not freely. Under Rule 4(1) a company spends CSR money itself or through one of four kinds of implementing agency: a Section 8 company, registered public trust or registered society that the company set up; one set up by the Central or a State Government; a statutory body created by an Act of Parliament or a State legislature; or any other Section 8 company, registered public trust or registered society with a track record of at least three years in similar activities. The company-established bodies and the bodies with a three-year track record must be exempt under section 10(23C) or registered under section 12A and approved under section 80G. Every agency must also hold a CSR registration number (Form CSR-1). Informal groups, unregistered collectives and individuals are not among the agencies listed in Rule 4(1).
Does employee volunteering count towards the 2%?
The monetary value of employees' time does not count as CSR expenditure. The MCA's FAQs say that employees' involvement in CSR projects cannot be monetised and accounted for under CSR expenditure (General Circular 14/2021, FAQ 3.18).
Can CSR fund our organisation's core costs?
CSR money is project money in law, because a company must show that it was spent on Schedule VII activities. Core support survives when framed as identifiable project costs (project management, MEL, quality assurance). Untied institutional grants are hard to fit into the CSR frame; pursue them from domestic philanthropy instead.
Is a donation to the PM CARES Fund or PM's National Relief Fund valid CSR?
Yes. The MCA's FAQs list the Prime Minister's National Relief Fund and the PM CARES Fund among the funds to which contributions count as CSR expenditure (FAQ 3.15), and an MCA office memorandum of 28 March 2020 places PM CARES under item (viii) of Schedule VII. Companies must also send an unspent amount that does not relate to an ongoing project to a Schedule VII fund within six months of the end of the financial year (section 135(5)). An NGO pitching in the last quarter for "use it or lose it" money should therefore pitch a real ongoing project instead.
What happens to the company if it just doesn't spend?
Section 135(7), in force since 22 January 2021, makes the company liable to a penalty of twice the amount it should have transferred or ₹1 crore, whichever is less, and each officer in default liable to one-tenth of that amount or ₹2 lakh, whichever is less. The board's report must also state the reasons for not spending. Giving reasons no longer excuses the shortfall.
ImpactMojo (2026). "CSR Law for the Social Sector." ImpactMojo Law Guides. Retrieved from https://impactmojo.in/law-guides/csr-law-social-sector.html
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