Understanding CSR Legislation in India: The Companies Act, 2013

India made history in 2014 by becoming one of the first countries in the world to make corporate social responsibility (CSR) a legal mandate. Through Section 135 of the Companies Act, 2013, the government required qualifying companies to dedicate a portion of their profits toward social and environmental causes. Over a decade later, annual CSR investments in India have grown to approximately ₹30,000 crore, reshaping how businesses engage with the communities around them. But how exactly does this legislation work, what activities does it cover, and what challenges has it created? Let’s break it all down.

What is Section 135 of the Companies Act, 2013? 🔗

Section 135 is the cornerstone of India’s CSR framework. It lays out which companies must comply, how much they need to spend, and the governance structure they must follow. Before this provision came into effect on April 1, 2014, CSR in India was largely voluntary. The 2013 Act changed that by creating a structured, mandatory system backed by penalties for non-compliance.

Which companies must comply? 🔗

Not every company in India is bound by CSR rules. The law applies only to companies that meet any one of the following financial thresholds in the immediately preceding financial year:

Net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. This applies to all types of companies – private, public, foreign companies operating in India, and even non-profit entities registered under Section 8 of the Act, provided they meet the financial criteria.

How much must companies spend? 🔗

Eligible companies must allocate at least 2% of their average net profit from the preceding three financial years toward CSR activities. For newly incorporated companies that haven’t completed three years, the average net profit of the available financial years is considered. The calculation of net profit follows the provisions of Section 198 of the Act, with certain adjustments – for instance, profits from overseas branches and dividends received from other CSR-compliant Indian companies are excluded from the computation.

The CSR committee and its role 🔗

Companies meeting the eligibility criteria must form a CSR Committee consisting of at least three directors, with at least one being an independent director. However, if the total CSR spending does not exceed ₹50 lakh, the company is exempt from forming a separate committee – the Board of Directors itself can discharge these functions.

The CSR Committee is responsible for three key tasks: formulating and recommending a CSR policy to the Board, recommending the expenditure amount, and monitoring the implementation of CSR activities over time. The Board must approve the CSR policy, disclose its contents in the company’s annual report, and publish it on the company’s website.

Penalties for non-compliance 🔗

India initially followed a “comply or explain” approach – companies could either spend the mandated 2% or explain why they didn’t. The Companies (Amendment) Act, 2020 tightened this significantly. A company in default now faces a penalty of twice the unspent amount or ₹1 crore, whichever is less. Every officer in default can also face a penalty of up to ₹2 lakh. Additionally, unspent amounts from ongoing projects must be transferred to an Unspent CSR Account within 30 days of the financial year end and spent within three years. Unspent amounts unrelated to ongoing projects must be transferred to a government-specified fund within six months.

Activities covered under Schedule VII 🔗

Companies cannot spend CSR funds on just anything. The law directs them to Schedule VII of the Companies Act, which lists broad categories of eligible activities. The Ministry of Corporate Affairs (MCA) has clarified that these categories should be interpreted liberally to cover a wide range of initiatives.

Poverty, healthcare, and sanitation 🔗

Eligible activities include eradicating hunger, poverty, and malnutrition, promoting healthcare (including preventive healthcare) and sanitation, contributing to the Swachh Bharat Kosh, and ensuring access to safe drinking water. This category has consistently been one of the largest recipients of CSR funds in India.

Education and skill development 🔗

Companies can invest in promoting education – including special education – employment-enhancing vocational skills (especially for children, women, elderly, and differently abled persons), and livelihood enhancement projects. Education continues to receive the highest share of CSR expenditure, with spending reaching ₹10,085 crore in recent years.

Gender equality and social equity 🔗

Schedule VII specifically recognises initiatives aimed at promoting gender equality, empowering women, and setting up homes and hostels for women and orphans. It also covers establishing old age homes, day care centres, and facilities for senior citizens, along with measures to reduce inequalities faced by socially and economically backward groups.

Environmental sustainability 🔗

Eligible environmental activities include ensuring ecological balance, protecting flora and fauna, promoting animal welfare, agroforestry, conserving natural resources, and maintaining the quality of soil, air, and water. Contributions to the Clean Ganga Fund also fall under this category. In FY22, India’s CSR spending on environment and sustainability more than doubled to ₹2,392 crore, making it the third-largest recipient sector after health and education.

Heritage, culture, and sports 🔗

Companies may also fund the protection of national heritage, art, and culture – including the restoration of historically significant buildings and the promotion of traditional arts and handicrafts. Training to promote rural sports, nationally recognised sports, and Paralympic and Olympic sports is also included.

Other eligible areas 🔗

Schedule VII extends to several other areas: welfare of armed forces veterans and their dependents, contributions to the PM CARES Fund and other government welfare funds, support for research and development at publicly funded institutions aligned with Sustainable Development Goals, rural development projects, slum area development, and disaster management activities including relief and rehabilitation.

What does not qualify as CSR? 🔗

It’s equally important to know what falls outside the CSR umbrella. Activities done in the normal course of business, projects conducted outside India (with limited exceptions for sports training), contributions to political parties, one-off events like marathons or sponsorships, and expenses incurred to fulfil other statutory obligations do not qualify as CSR expenditure. Similarly, CSR activities that benefit only the company’s employees and their families are excluded.

Challenges facing CSR implementation in India 🔗

While the law has significantly increased corporate contributions to social causes, its implementation has not been without friction. Several structural and operational challenges persist.

Compliance-driven mindset 🔗

Many companies still treat CSR as a compliance checkbox rather than a strategic priority, allocating budgets at year-end to meet the 2% requirement. This leads to fragmented projects with limited long-term impact. Projects are sometimes chosen based on management preferences rather than community needs, and short-term thinking results in one-off interventions instead of sustainable programmes. In FY 2024, nearly 65% of CSR-active organisations implemented fewer than five projects, often as one-time grants.

Measuring impact remains difficult 🔗

Companies spend heavily on CSR activities but rarely track actual outcomes. The current monitoring and evaluation framework tends to emphasise quantitative metrics (how much was spent) over qualitative assessment (what difference it made). The absence of standardised impact measurement methodologies makes cross-project comparisons difficult and affects overall transparency.

Geographical imbalance in fund distribution 🔗

CSR spending in India is heavily concentrated in states where major corporate headquarters are located. CSR funds tend to flow disproportionately to industrialised states like Maharashtra and Gujarat, leaving backward regions underserved. This unequal distribution of funds across regions directly contradicts the legislation’s underlying objective of inclusive development. While Section 135 advises companies to give preference to local areas near their operations, this is considered advisory rather than mandatory.

Capacity constraints among implementing partners 🔗

The unequal power dynamics between corporations and NGOs, short implementation windows, and over-reliance on intermediary agencies often hinder meaningful results. Many local NGOs lack the technical capabilities – such as digital reporting tools and impact assessment skills – that corporate partners increasingly demand. CSR funds also cannot legally support NGO reserves, limiting the ability of implementing organisations to plan for the long term.

Complex regulatory requirements 🔗

The 2% rule sounds simple, but the reporting requirements are extensive. Many companies struggle with documentation and transparency. The rules around unspent amounts, transfers to government funds, ongoing versus non-ongoing projects, and the filing of forms like CSR-1 and CSR-2 add layers of complexity – particularly for smaller companies that cross the eligibility thresholds for the first time.

Opportunities and the road ahead 🔗

Despite the challenges, India’s CSR framework has also unlocked significant opportunities for both businesses and communities.

Shift toward outcome-based programmes 🔗

Early trends suggest a gradual rise in environment and climate-related CSR spending, particularly in renewable energy, water security, and afforestation. Companies are increasingly moving from single-year, fragmented projects to multi-year programmes with measurable outcomes. By 2026, CSR in India is expected to shift from spend-focused compliance toward outcome-based programmes with stronger emphasis on impact measurement and alignment with sustainability goals.

Technology as an enabler 🔗

Digital tools are transforming both CSR delivery and measurement. The MCA’s updated web-based CSR-1 registration process (launched in July 2025) reflects the government’s push for greater digital transparency in CSR compliance. Companies are also using data analytics and digital dashboards to track the effectiveness of their initiatives in real time.

Alignment with ESG and SDGs 🔗

CSR has emerged as a vital instrument for advancing inclusive and sustainable development, contributing directly to SDG-4 (Quality Education), SDG-3 (Good Health), SDG-8 (Decent Work), and SDG-13 (Climate Action). As environmental, social, and governance (ESG) reporting gains importance globally, Indian companies are finding natural synergies between their CSR obligations and broader sustainability commitments.

Employee engagement and shared value 🔗

Forward-thinking companies are involving employees in CSR planning and execution. Skill-based volunteering and employee-nominated projects are improving both community outcomes and internal engagement. Some organisations now link CSR strategy with employee retention, recognising that younger professionals increasingly value companies whose social stance aligns with their personal values.

India’s CSR law in a global context 🔗

India was the first country to mandate corporate social responsibility provisions through legislation. While many countries encourage CSR through tax incentives or voluntary guidelines, India’s approach of combining mandatory spending with disclosure requirements and penalties is unique. This model has drawn attention from policymakers and researchers globally, with UNESCO noting that the programme has shown promising results in terms of increased compliance and significant investments in areas like education, healthcare, and rural development.

That said, the legislation continues to evolve. The 2021 amendments to the CSR Rules introduced concepts like annual action plans, impact assessments for companies spending ₹10 crore or more on CSR, and clearer definitions around ongoing projects. These refinements signal the government’s intent to move the framework from mere compliance toward genuine, measurable social impact.

What do you think? Has India’s mandatory CSR model struck the right balance between corporate accountability and business flexibility, or does it need further reform to deliver deeper, more equitable impact across the country?

References

1. https://indiankanoon.org/doc/120906957/
2. https://blog.ipleaders.in/section-135-of-companies-act-2013/
3. https://ca2013.com/135-corporate-social-responsibility/
4. https://www.india-briefing.com/news/corporate-social-responsibility-india-5511.html/
5. https://www.aubsp.com/schedule-vii-csr-activities/
6. https://www.drishtiias.com/daily-updates/daily-news-editorials/reimagining-corporate-social-responsibility-in-india
7. https://www.unesco.org/en/dtc-financing-toolkit/mandatory-corporate-social-responsibility-csr-india