Corporate Social Responsibility (CSR) under the Companies Act, 2013

A practical guide for business owners to understand if CSR applies and how to handle it effectively.

What is CSR? (Let’s get the terminology right)

Corporate Social Responsibility (CSR) means: when a company meets certain financial thresholds, it must allocate a portion of its profits to socially-oriented and community-development activities under law. It’s not optional—in India it is mandatory for certain companies under the Companies Act, 2013.

This means: if you’re a business owner whose company becomes 'large enough', you must plan CSR, spend it, monitor it and disclose it.

Does CSR Apply to Your Company? (The quick 'yes/no' test)

CSR applies to every company in its individual capacity if it meets any one of the following thresholds in the immediately preceding financial year:

• Net worth: ₹ 500 crore or more
• Turnover: ₹ 1,000 crore or more
• Net profit: ₹ 5 crore or more

If you trigger one of these, you must start adhering to CSR provisions from that financial year. If not, you’re currently exempt—but still useful to keep it on your radar.

What Your Company Must Do (The steps in plain business-terms)

Once the threshold is crossed:

a) Form a CSR Committee

A company meeting the CSR thresholds must constitute a Board-level CSR Committee with a minimum of two directors (no Independent Director is required for a private company). However, if the CSR expenditure does not exceed ₹50 lakh in a financial year, the Board may discharge the functions of the CSR Committee, and a separate committee is not required.

b) Approve a CSR Policy

Your company needs a written policy: which kinds of activities you will support (aligned to Schedule VII categories), how you will execute them, how you will monitor and report.

c) Spend the CSR amount

– The Board must ensure that at least 2% of the average net profits of the preceding three years is spent on CSR activities.

– If for some reason the money isn’t spent within the year:

• For an ongoing project: transfer the unspent amount to an 'Unspent CSR Account' within 30 days from year-end and spend it within three years.
• For Other than ongoing project: transfer the unspent amount to a fund specified in Schedule VII within six months of year-end.

Companies may also spend in excess of their CSR obligation and set off such excess against future CSR requirements for up to three succeeding financial years.

Why Business Owners Should Care

This isn’t just 'doing good'. It’s:

• A legal obligation with defined timelines and consequences.
• A reputation asset: stakeholders, banks, investors look at CSR as part of governance and ESG.
• A risk mitigation tool: when local community, environment or regulatory issues arise, companies with strong CSR track records often fare better.
• A competitive differentiator: in many sectors CSR is increasingly part of how business is evaluated.

Penalties for Non-Compliance

Here’s what happens if you drop the ball:

• For non-spend or failure to transfer unspent amounts, under Section 135(7) you could face a penalty equal to twice the unspent amount or ₹1 crore, whichever is less.
• Officers in default (directors, KMPs) can be liable to a penalty equal to one-tenth of the unspent amount or ₹2 lakh, whichever is less.
• For disclosure failures (Board Report missing CSR policy or spend info) penalties under Section 134 and Section 450 may apply.

Bottom line: non-compliance = significant financial and reputational cost.

A Real-Life Example to Show How Seriously It’s Enforced

The company Toyota Tsusho Systems India Private Limited ran into trouble: for the financial year ending 31 March 2021, the company was required to spend ₹11,11,871 under CSR or transfer that amount to a Schedule VII fund by 30 Sept 2021. It delayed that transfer until 20 Dec 2021 (an 80-day delay).

As a result, the Registrar of Companies, Karnataka imposed a penalty of ₹24.46 lakh on the company and its directors/officers.

Practical CSR Checklist

Use this each year:

Conclusion

CSR is now a key compliance requirement. Managed well, it strengthens your brand and stakeholder trust; managed poorly, it results in penalties and governance issues. The rule is simple: know if CSR applies to you and plan early—don’t leave it as a last-minute task.

Disclaimer:

The information contained in this document is for information purposes only. In no way, this document should be treated as advice. Please reach out to us or your consultants for undertaking detailed analysis.

This author will not be liable for any loss or damage caused by the reader’s reliance on information obtained through this report. The contents are provided for your reference only.

About Asksolique.ai

Asksolique.ai is a context-centric AI tool built for Indian tax professionals. Click here to access.

Try it for free and see how much time you win back to focus on what truly matters.