CSR Compliance Under the Companies Act: Who Must Spend, and How

Crossing a size threshold in India doesn't just change how much tax a company pays. Once net worth, turnover, or net profit for a financial year cross specified levels, a company gets pulled into an entirely different compliance track under the Companies Act: a mandatory Corporate Social Responsibility spend, a committee of the board to oversee it, and a board's report that has to account for every rupee that didn't get spent. Companies that have stayed comfortably below these thresholds for years sometimes cross them almost by accident, on the back of one strong year, and only discover the CSR obligation exists when a CA or auditor flags it during year-end closing. This piece walks through how CSR applicability actually works for FY 2026-27, what counts as eligible spending, what happens when the full amount doesn't get spent, and what a newly-applicable company should do first. One thing upfront: the exact rupee thresholds that trigger applicability and the exact percentage of profit that must be spent are precisely the kind of figures that get amended and then misquoted for years afterward. This piece deliberately doesn't restate them. Treat every mention of a 'specified threshold' or 'prescribed percentage' below as a prompt to confirm the current figure against the Companies Act and CSR Rules before relying on it.

Who CSR Obligations Actually Apply To

Section 135 of the Companies Act is the provision that creates the CSR obligation, and it works on a simple trigger: if a company's net worth, turnover, or net profit for the immediately preceding financial year crosses a specified threshold, even on just one of those three tests, the company falls within CSR. It doesn't need to cross all three. A company with modest turnover but a large net profit in the relevant year can find itself covered on the net profit test alone, and a capital-heavy company can get pulled in purely on net worth even in a year it barely turned a profit. Because the current thresholds are exactly the kind of figures that shift with amendments to the Companies Act and CSR Rules, and get misquoted for years after they change, they aren't restated here. What matters operationally is the mechanism: check all three figures for the immediately preceding financial year against the thresholds currently in force, and if any one of them is crossed, CSR applies for that year.

Applicability isn't a one-time label a company earns and keeps forever. It's tested afresh every year against the immediately preceding financial year's numbers, which means a company can genuinely move in and out of the CSR net as its financials change. The precise treatment of a borderline year, or a year where the company falls back below the thresholds after previously crossing them, is worth confirming against the current CSR Rules rather than assumed from how it worked in an earlier year. For a company that hasn't yet completed three financial years of existence, the spending calculation that follows simply uses the average net profit over however many years the company has actually been in operation.

The CSR Committee and the Spending Obligation

Once a company is within CSR, two things follow. First, the board has to constitute a CSR Committee, which recommends a CSR policy to the board and oversees how it's implemented through the year. Second, the company has to spend at least a prescribed percentage of its average net profit, calculated over the three financial years immediately preceding the year in question, on CSR activities. Both the exact percentage and the finer mechanics of how average net profit is computed under the Act (it isn't simply accounting profit before tax) are worth checking directly against Section 135 and the CSR Rules currently in force, since this is another figure that isn't safe to repeat from memory or an older article.

In practice, this turns the CSR Committee's job into an annual cycle rather than a one-time exercise: recommending the policy and revising it when needed, working out the year's spending target as soon as the prior three years' profit figures are final, approving or reviewing projects and implementing partners, and monitoring actual spend against the target through the year rather than only at close. A committee that meets once a year to sign off on a number the finance team calculated at the last minute is technically constituted, but it isn't doing the oversight job the Companies Act actually expects of it.

What Actually Counts as Eligible CSR Spending

Not every socially useful expense qualifies as CSR spend. To count, spending generally has to go toward activities that fall within Schedule VII of the Companies Act, a schedule that covers broad categories such as education, healthcare, environmental sustainability, and poverty and hunger relief, among others. The categories are broad by design, and most genuine community-facing initiatives a company might want to run will fit somewhere within them, but the fit has to be real. A marketing campaign dressed up as a CSR project, or a payment that mainly benefits the company's own customers or business relationships, is not what the schedule is meant to cover. The Companies Act also carves out specific exclusions regardless of how the activity gets framed internally, including activities undertaken in the normal course of business, spending that only benefits the company's own employees and their families, and contributions to political parties. Activities carried out outside India generally don't count either, with narrow, specific exceptions.

Spending also has to move through an eligible implementing mode. A company can carry out projects itself through its own registered CSR entity, typically a Section 8 company, registered trust, or registered society set up or backed by the company, or it can route the spend through an established third-party implementing agency or NGO. Either way, the implementing entity actually has to be registered with the government for this purpose and meet the conditions the CSR Rules prescribe, including a track record of running similar programmes. This registration step isn't a formality to skip. Spending routed through an entity that hasn't completed it, however credible the organisation looks on paper, doesn't count as compliant CSR spend.

The Spend or Explain Mechanism: What Happens to Unspent Amounts

A company that doesn't spend its full CSR obligation for the year isn't automatically in default, but it isn't off the hook either. The unspent amount generally has to go one of two ways. Where the shortfall isn't linked to any ongoing project, the unspent amount must be transferred to a specified government fund within the timeline the CSR Rules prescribe. Where it is linked to an ongoing project, the unspent amount instead moves into a separate unspent CSR account, ring-fenced for that project, to be spent within a following period rather than simply carried forward informally in the accounts. Either route needs an actual transfer, not a note saying the money is earmarked.

The part that catches companies out usually isn't the underspending itself. It's the disclosure. The board's report has to set out what was spent, what wasn't, and why, and this explanation is a mandatory part of the report, not optional colour. An unspent amount that's properly transferred where required, and properly explained in the board's report, belongs to a company that has complied with the mechanism, even though the spending target wasn't met in cash terms. An unspent amount sitting unexplained, or a transfer that never happened, is a compliance failure in its own right, separate from and on top of the underspending itself. It's also exactly the kind of thing statutory auditors are trained to look for: reporting on whether unspent CSR amounts were transferred to the prescribed fund or account within the required timeline is a standard part of what an auditor checks under the applicable audit reporting requirements.

Building a CSR Plan That Doesn't Turn into a Year-End Scramble

The companies that struggle most with CSR aren't usually confused about the law. They're the ones that treated the year's spend as a number to hit in March rather than a budget to plan and deploy through the year. Sourcing credible implementing partners, vetting their registration and track record, structuring projects that can actually absorb the budget, and getting board approvals in place all take real time, and none of it compresses well into the last few weeks of a financial year. A company that starts looking for partners in February is choosing from whoever still has capacity, not from the strongest fit for its CSR policy. A rushed, incomplete spend doesn't just mean a lower number in the board's report either. It means walking straight into the unspent-amount mechanism above: a transfer to a government fund or a ring-fenced account that earlier planning could largely have avoided, and a shortfall the board's report now has to explain in detail rather than record as a routine line item.

For a company that has just crossed a threshold for the first time, sequencing matters. Constituting the CSR Committee and getting a CSR policy approved by the board should happen early, well before anyone tries to calculate the year's spending target down to the rupee. Identifying credible implementing partners, and confirming their CSR registration, should start at the same time, not after the target is already known. A CSR programme that's still being assembled in the last quarter is a CSR programme that's very likely to end the year with an unspent balance and an explanation to write.

A Practical CSR Planning Checklist

• Test applicability every year against the immediately preceding financial year's net worth, turnover, and net profit. Don't assume last year's status automatically carries forward.
• As soon as applicability is confirmed, constitute the CSR Committee and get its composition formally recorded in the board minutes.
• Get a CSR policy approved by the board, recommended by the CSR Committee, and revisited at least once a year rather than left untouched since it was first adopted.
• Calculate the year's spending target early, based on the average net profit of the preceding three financial years, instead of waiting for the year-end audit to surface the number.
• Identify and vet implementing partners well before the last quarter, whether the company's own registered CSR entity or an outside agency, and confirm their CSR registration before routing any spend through them. Credible, properly registered partners with a genuine track record get booked up early.
• Build a project pipeline that can actually absorb the budget across the year in stages, rather than one large disbursement in March.
• Track actual spend against the target every quarter, so a developing shortfall is visible with enough time left to act on it.
• Prepare the board's report disclosure, including a clear, specific explanation for any shortfall, as part of year-end closing rather than as an afterthought.