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
India was the first major economy to make corporate social spending a statutory obligation. Section 135 of the Companies Act, 2013 requires every qualifying company to constitute a CSR committee, adopt a CSR policy, and spend at least 2% of its average net profits on activities listed in Schedule VII of the Act. Annual CSR spending now runs into tens of thousands of crores — for many Indian NGOs it has replaced foreign funding as the largest institutional source.
Until 2021 the regime was "comply or explain": a company could skip spending if its board explained why. The 2021 amendments made it genuinely mandatory — unspent money must be parked or surrendered on a statutory timeline, and shortfalls attract monetary penalties. That shift changed behaviour on both sides: companies became far more process-driven, and the paperwork they demand from NGO partners grew accordingly.
The law in six points
- Who must spend. Any company with net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore in the immediately preceding financial year. The net-profit test catches many mid-sized companies that don't think of themselves as "CSR companies."
- What counts. Only activities within Schedule VII — eradicating hunger and poverty, education, gender equality, environment, heritage, sports, armed-forces veterans' welfare, notified funds, incubators and R&D, rural and slum development, disaster relief. Interpreted liberally, but activities in the "normal course of business," those benefiting only employees, political contributions, and (with narrow exceptions) activities outside India are excluded.
- How it can be spent. Directly by the company, or through implementing agencies: Section 8 companies, registered public trusts, or registered societies — each needing income-tax registration (12A and 80G) and a CSR-1 registration number from MCA.
- Unspent money has a destination. Money unspent on "ongoing projects" goes to a special Unspent CSR Account within 30 days of year-end and must be used within 3 financial years. Other unspent amounts go to a Schedule VII government fund within 6 months. Miss these and penalties follow — up to twice the unspent amount for the company (capped at ₹1 crore) and personal penalties for officers.
- Impact assessment is sometimes compulsory. Companies with CSR obligations of ₹10 crore or more must commission independent impact assessments for completed projects of ₹1 crore or more — one reason MEL capability is now a differentiator for implementing NGOs.
- Surplus and capital assets are regulated. Any surplus from CSR projects must be ploughed back or transferred, not booked as business profit. Assets created with CSR money must be held by the beneficiary community, a public authority, or a registered entity with CSR-1 — not by the funding company.
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 diligence requirements are why NGO onboarding feels like a loan application.
Board committee (3+ directors, one independent where applicable) that recommends policy, budgets, and monitors implementation. Companies with obligations under ₹50 lakh may skip the committee and let the board act directly.
A Section 8 company, registered public trust, or registered society with 12A, 80G, and CSR-1. If not established by the company itself, it generally needs a 3-year track record of similar activities. Executes 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 actually require of you.
Gray areas practitioners argue about
The Rules cap the company's "administrative overheads" at 5% of its CSR spend — and MCA guidance reads this as covering the company's own general management of CSR, not the implementing NGO's project-delivery costs. 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 regime is far more forgiving for multi-year "ongoing projects" (3-year runway) than for everything else (6 months). Companies therefore structure programmes as ongoing projects — but the design must be genuine and board-approved as such from the start, not relabelled in March.
Training farmers a company buys from, or running schools near a plant, can drift towards business benefit. The exclusion for activities in the normal course of business is policed through disclosure and audit rather than bright-line rules — expect scrutiny where the CSR project and the business overlap.
CSR from an Indian company that qualifies as a "foreign source" under FCRA (majority foreign-owned beyond FDI-cap protection) may be foreign contribution in the NGO's hands — requiring FCRA registration to accept. Both sides routinely miss this. Ask for the funder's FCRA-source status in writing.
Frequently asked questions
Can a company give CSR money to any NGO it likes?
No. The recipient must be one of the eligible entity forms, hold 12A/80G and CSR-1, and (unless company-established) show a 3-year track record. Informal groups, unregistered collectives, and individuals cannot receive CSR funds directly.
Does employee volunteering count towards the 2%?
The monetary value of employee time does not count as CSR expenditure. Out-of-pocket project costs incurred alongside volunteering can count if the activity itself qualifies under Schedule VII.
Can CSR fund our organisation's core costs?
CSR money is project money in the eyes of the law — companies must show utilisation against 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 — contributions to funds notified in Schedule VII count in full. This is also where companies must send certain unspent balances, which is exactly why NGOs pitching in Q4 for "use it or lose it" money should pitch genuine ongoing projects instead.
What happens to the company if it just doesn't spend?
Since 2021: a penalty of up to twice the unspent amount required to be transferred (capped at ₹1 crore) for the company, and up to one-tenth of that (capped at ₹2 lakh) for each defaulting officer — plus the reputational cost of disclosure in the board's report. "We'll explain it away" is no longer an option.
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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