What is CSR (Corporate Social Responsibility) under the Companies Act

CSR, or Corporate Social Responsibility, is a legal duty under Section 135 of the Companies Act, 2013. Companies that cross certain size limits must set up a CSR committee and spend a set share of their profit on approved social causes. Eligible companies also report this spending to the MCA through CSR-1 filing.

Why CSR matters for a company

Many founders think CSR is charity they can skip. It isn’t. If your company meets the test, the board has to act, and it has to explain itself in the board’s report if the money is not spent. Getting this wrong can invite questions from the ROC, so it is worth checking early, not at year-end.

Who has to follow CSR rules

A company must follow Section 135 if, in the preceding financial year, it had any one of these:

• Net worth of Rs 500 crore or more
• Turnover of Rs 1,000 crore or more
• Net profit of Rs 5 crore or more

Most small private companies fall below all three. Still, a fast-growing startup or a family company with one very good year can cross the net profit line without noticing.

What the law asks you to do

• Form a CSR committee of directors (the minimum size and the independent director rule have exceptions for private companies and for boards with only two directors).
• Spend at least 2% of the average net profit of the last three financial years on CSR.
• Pick activities from Schedule VII, such as preventive healthcare, women’s empowerment, environmental sustainability, rural development and sports training.
• Record the reasons in the board’s report if the amount is not spent.

Money cannot go to political parties, to benefits for your own employees and their families, or to work you do in the normal course of business.

Giving through a Section 8 company or NGO

Most companies don’t run projects themselves. They fund an implementing partner, usually a trust or a non-profit. A Section 8 company is a popular choice for this, and it must keep up its annual compliance to stay in good standing with donors.

Common mistakes

• Never testing the three limits each year, then missing that the company has crossed one.
• Choosing a project that looks good but isn’t in Schedule VII.
• Paying an implementing agency that hasn’t registered for CSR.
• Keeping no board resolution or minutes for the CSR plan.

Related guides: Board resolution explained, MCA and ROC: what they do, MSME classification

FAQs

Does a small private company need to spend on CSR?

Only if it meets one of the three limits in the preceding financial year. If it doesn’t, Section 135 does not apply to it.

How much must be spent?

At least 2% of the average net profit of the previous three financial years, calculated as the Act describes.

Can CSR money go to my own employees’ welfare?

No. Spending that benefits employees or their families does not count as CSR.

Not sure whether your company falls under CSR? Talk to a Taxhint expert and we will check the numbers with you.