Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed against Section 135 of the Companies Act, 2013 and the CSR Rules
Introduction
Foreign groups assume corporate social responsibility is a rule for large Indian conglomerates. It is not, and the trigger that catches them is the one they least expect.
CSR under Section 135 is a mandatory spending obligation — not voluntary philanthropy — for every company, including foreign subsidiaries, meeting net worth ₹500 crore, turnover ₹1,000 crore, or net profit ₹5 crore in the preceding year.
Read the first threshold again. Net worth. Not profit.
A foreign group that capitalised its Indian manufacturing subsidiary heavily — equity for a plant, for inventory, for a long build-out — can cross ₹500 crore of net worth while making no profit at all. Even though net profit is below ₹5 crore, CSR applies because net worth is ₹500 crore or more.
There is a second point that catches groups with an established global CSR programme. Implementing agencies must hold CSR-1 registration, and international organisations and foreign foundations cannot register. Your group foundation cannot be the vehicle.
And a third: using tax profit instead of Section 198 profit to calculate the 2% is a recurring error. The computation is its own thing, and neither the tax figure nor the accounting figure is it.
This guide covers who is caught, why applicability and spending are separate questions, what the money can be spent on and through whom, and what happens to what is left over.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. CSR is the obligation most often assumed not to apply, discovered when the auditor raises it, and hardest to remediate because the year has already closed.
Where a rule is settled we state it. Where an amendment is pending — and one is — we say what is proposed and what applies until it is notified.
Primary source: the Ministry of Corporate Affairs for Section 135 of the Companies Act, 2013, Schedule VII, and the Companies (Corporate Social Responsibility Policy) Rules.
1. Who is caught
Section 135(1) applies to every company — including holding, subsidiary, foreign and Section 8 companies — that meets any one of the thresholds in the immediately preceding financial year. All companies registered under the Act are covered: private companies, listed and unlisted, Section 8 companies, and foreign companies with a branch or project office in India.
This applies to both Indian companies and to foreign companies which have branch or project offices in India.
1.1 Foreign ownership is irrelevant
An Indian private limited company owned entirely by an overseas parent is a company registered under the Act. It is caught on the same terms as any other.
And a foreign company that has not incorporated at all — operating through a branch or project office — is also within scope.
There is no exemption for foreign ownership, for being a captive, or for being loss-making.
2. The three thresholds, and the two different periods
This is where most applicability errors originate.
| Threshold | Amount | Tested over |
|---|---|---|
| Net worth | ₹500 crore or more | The immediately preceding financial year |
| Turnover | ₹1,000 crore or more | |
| Net profit | ₹5 crore or more | |
| The spend | 2% of average net profits | The three immediately preceding financial years |
You look only at the immediately preceding financial year, not a rolling average. If any one criterion is met, CSR becomes applicable for the next year — even if the others are below threshold.
2.1 The error this produces
Checking applicability wrongly — using three-year averages instead of the immediately preceding year for the thresholds — is a common mistake.
Two periods, doing two different jobs. One year decides whether the section applies. Three years decide how much you spend.
Groups that average the thresholds conclude they are outside when they are not.
2.2 Any one is enough
The thresholds are alternatives, not cumulative. A company with modest turnover, no profit and a large balance sheet is caught by net worth alone.
This is the position of many foreign-owned manufacturing and infrastructure subsidiaries in their build-out years.
2.3 It is assessed every year
The assessment is made every financial year.
If a company’s net profit exceeds the threshold in one year but drops below in the next, it must comply for the year in which the threshold was met. The obligation is assessed annually.
A company can be in scope one year and out the next. That is a calendar item, not a one-off determination.
3. Section 198 profit
The 2% is computed on a figure that is neither the tax number nor the accounting number.
Eligible companies are required to spend at least 2% of their average net profits, computed under Section 198, from the immediately preceding three financial years.
Using tax profit instead of Section 198 profit to calculate the 2% is a recurring error.
3.1 What Section 198 is
Section 198 sets out a specific method for computing net profit for certain Companies Act purposes, with prescribed credits and deductions. It is the same computation used for managerial remuneration limits.
The figure it produces will generally differ from both the profit before tax in the accounts and the taxable income in the return.
3.2 What this means practically
The computation should be prepared deliberately, by someone who has done it before, and documented. It is not a line item that can be lifted from the financial statements.
For a group whose Indian finance function is small or outsourced, this is worth flagging to the auditor early rather than at the year-end.
4. Applicability and spending are separate questions
A point that resolves a great deal of confusion, particularly for the net worth case.
| Question | Answered by |
|---|---|
| Does Section 135 apply? | Any one of the three thresholds in the immediately preceding year |
| How much must be spent? | 2% of average Section 198 net profits over three preceding years |
4.1 The loss-making, well-capitalised company
A foreign-owned subsidiary with ₹600 crore of net worth and no profits over three years is within Section 135 — the net worth threshold is met — but the 2% computation on nil or negative average profits produces no spending obligation.
What survives is the procedural obligation: the policy, the board’s consideration, and the disclosure in the board’s report.
A company in that position that files nothing on the basis that it has no spend has still not complied. The disclosure is required either way.
4.2 The reverse case
Equally, a company that was profitable historically but falls below all three thresholds in the immediately preceding year is outside the section for that year, whatever its three-year average profits look like.
5. The CSR Committee, and the relief
Where the section applies, the company constitutes a CSR Committee of the board, which formulates the policy, recommends the activities and the amount, and monitors implementation.
5.1 The small-spend relief
Where the amount required to be spent does not exceed ₹50 lakh, the requirement to constitute a CSR Committee does not apply, and the board discharges those functions itself.
For most foreign-owned subsidiaries newly crossing a threshold, the spend will be below that figure, so the practical answer is a board-level process rather than a separate committee.
The relief removes the committee. It does not remove the policy, the spend or the disclosure.
5.2 The pending composition change
The Companies (Amendment) Bill proposes mandating at least one CSR-experienced director on the CSR Committee.
Worth tracking for a group that will constitute a committee, because it affects board composition.
6. Schedule VII, and what does not count
The obligation is 2% of average net profits, deployable only on Schedule VII activities.
Schedule VII is a closed list — eradicating hunger and poverty, promoting education, gender equality, environmental sustainability, protection of national heritage, benefit of armed forces veterans, rural development, contributions to specified funds, and other listed heads.
6.1 The exclusion foreign groups run into
Treating brand campaigns or customer promotions as CSR is a recurring error.
This catches groups with well-developed global community programmes, because those programmes are frequently built with a brand dimension — the company’s name on the initiative, marketing around it, customer participation.
Activity undertaken in the normal course of business, or that primarily benefits the company’s own employees, or that is marketing in substance, does not qualify. The spend has to be genuinely directed at a Schedule VII purpose.
6.2 Map the global programme before assuming it works
The useful exercise is to take the group’s existing CSR activity in India and test each element against Schedule VII and against the exclusions, rather than assuming that because it is called CSR globally it counts in India.
Some of it usually does. Rarely all of it.
7. The implementing agency problem
This is the structural obstacle for groups with an established global foundation, and it is not widely flagged.
Implementing agencies must hold CSR-1 registration. International organisations and foreign foundations cannot register.
7.1 What follows
A group that channels its worldwide community spending through its own foundation, registered in its home country, cannot use that vehicle for Indian CSR.
The Indian spend must go through an entity that holds CSR-1 registration — an Indian implementing agency, or the company itself, or an eligible Indian entity established by the company or its group.
7.2 The options
| Route | Consideration |
|---|---|
| Direct implementation by the company | Requires internal capacity to run and evidence the activity |
| An Indian implementing agency with CSR-1 registration | The common route; verify the registration before committing funds |
| An Indian entity established by the group | Feasible but requires set-up and its own registration |
| Contribution to a Schedule VII fund | Simple and compliant, but gives no programme control |
| The group’s overseas foundation | Not available |
7.3 Verify the registration
Unverified implementing agency names are among the disclosure failures that invite scrutiny.
Confirm the CSR-1 registration number before funds move, and record it. An agency that turns out not to be registered leaves the spend ineligible after the money has gone.
8. Unspent amounts
What happens to money that was required to be spent and was not.
| Ongoing project | Not an ongoing project | |
|---|---|---|
| Where it goes | A separate Unspent CSR Account | A Schedule VII Fund — PM National Relief Fund, PM CARES and others |
| When | Within 30 days of the financial year end | Within the prescribed period after the year end |
| Then | Spent within three financial years | Gone — no further control |
8.1 The thirty-day clock
This is the deadline groups miss, because it falls in the weeks immediately after the year end when nobody is thinking about CSR.
Where a company was required to spend ₹14 lakh and spent only ₹8 lakh, the unspent ₹6 lakh must be transferred to the Unspent CSR Account within 30 days of 31 March — by 30 April — if it relates to an ongoing project, or to a Schedule VII Fund if the project is non-ongoing. Failure to transfer triggers a penalty of up to twice the unspent amount or ₹1 crore, whichever is lower.
Note that the penalty attaches to the failure to transfer, separately from the underspend itself. A company that underspends and transfers on time is in a materially better position than one that underspends and does nothing.
8.2 The ongoing-project classification matters
It decides whether the money stays under the company’s control for three more years or leaves permanently.
Classify projects deliberately at the point of approval, and document the basis. A project reclassified after the year end, to justify retaining the money, is not a strong position.
9. Reporting
The disclosure obligations are independent of the spend, and each failure counts on its own.
Missing project details, unverified implementing agency names, absent shortfall justifications, or failure to disclose unspent transfers are each independent disclosure failures that invite scrutiny.
| Where | What |
|---|---|
| Board’s report annexure | The CSR report — policy, committee, amount, spend, projects, implementing agencies, shortfall and its reasons |
| Form CSR-2 | The prescribed CSR reporting form filed with the Registrar |
| Company website | Policy and committee composition, where a website is maintained |
| Financial statements | Disclosure of amounts spent, unspent and transferred |
9.1 The shortfall justification
Where the full amount was not spent, the board’s report must state the reasons. A shortfall with no explanation is a separate failure from the shortfall itself.
Say what happened and why, in the report. An honest explanation of a delayed project is a better record than silence.
10. Penalties
For the company: twice the unspent amount or ₹1 crore, whichever is lower. For every officer in default: one-tenth of the unspent amount or ₹2 lakh, whichever is lower.
Penalties are imposed under Section 135(7) read with Section 135(8) of the Companies Act, 2013.
For other violations, such as failure to constitute a CSR Committee or to disclose the policy, general penalty provisions apply.
10.1 Civil, but personal
The regime was softened from criminal to civil in 2021, but personal liability remains real for directors and key managers.
For a foreign-owned subsidiary, the officers in default will include the resident director and any parent nominees on the Indian board. That is a personal exposure attaching to individuals who may not have been told the obligation existed.
See the resident director requirement under Section 149(3).
11. The pending amendment
The Corporate Laws (Amendment) Bill, 2026 proposes to increase the net profit threshold from ₹5 crore to ₹10 crore, while keeping net worth and turnover limits unchanged.
The net worth trigger of ₹500 crore and the turnover trigger of ₹1,000 crore remain, the 2% formula stays the same, Schedule VII is unaltered, the penalty provisions remain in force, and CSR Committee requirements are unchanged.
11.1 What applies until then
Until the Bill is passed and notified, companies must continue complying with the existing ₹5 crore threshold. Compliance teams should monitor this development closely.
A company sitting between ₹5 crore and ₹10 crore of net profit is in scope now and would be out of scope if the Bill is notified as proposed. That is a reason to watch it, not a reason to act as though it has happened.
11.2 Note the direction of travel is contested
Published commentary also refers to an earlier proposal running the other way — lowering applicability thresholds to net worth ₹100 crore, turnover ₹500 crore and net profit ₹3 crore.
The more recent and more consistently reported proposal is the increase to ₹10 crore. Either way, both are proposals. Confirm the notified position before relying on any threshold other than the current one.
12. Two situations, worked through
Scenario A — The plant that triggered CSR without profit
A Japanese group capitalises its Indian manufacturing subsidiary with ₹650 crore of equity for a greenfield facility. The company is three years into the build and has made losses throughout.
The assumption. CSR is for profitable companies. It does not apply.
The position. The net worth threshold is met, so Section 135 applies. The 2% computation on nil or negative average Section 198 profits produces no spending obligation, but the policy, board consideration and disclosure obligations do apply.
What was needed. A CSR policy, board consideration recorded, and the CSR disclosure in the board’s report stating the position — not silence on the basis that there was nothing to spend.
Scenario B — The global foundation that could not be used
A European group’s Indian subsidiary crosses the net profit threshold. The group has a mature global CSR programme run through its own foundation, and the Indian team proposes to fund the foundation’s India work.
The problem. Implementing agencies must hold CSR-1 registration, and international organisations and foreign foundations cannot register. The group foundation cannot be the vehicle.
The second problem. Part of the programme is built around brand visibility and customer participation, which does not qualify.
The response. Identify an Indian implementing agency with verified CSR-1 registration, or establish an eligible Indian entity; and map the intended activities against Schedule VII, retaining what qualifies and funding the balance elsewhere.
The timing lesson. This takes months. Starting in the final quarter produces an underspend, a transfer to the Unspent CSR Account, and a shortfall to explain.
13. Twelve mistakes
- Assuming CSR is for large Indian conglomerates. It applies to foreign subsidiaries and to foreign companies with a branch or project office.
- Looking only at profit. Net worth of ₹500 crore triggers it on its own.
- Averaging the thresholds over three years. Applicability is tested on the immediately preceding year.
- Confusing the two periods. One year decides applicability; three years decide the amount.
- Using tax profit or book profit instead of the Section 198 computation.
- Assuming no spend means no obligation. Policy, board consideration and disclosure survive a nil spend.
- Treating the global CSR programme as transferable. Foreign foundations cannot hold CSR-1 registration.
- Not verifying the implementing agency’s CSR-1 registration before funds move.
- Counting brand campaigns or customer promotions as CSR.
- Missing the 30-day transfer to the Unspent CSR Account, which carries its own penalty.
- Reclassifying a project as ongoing after the year end to justify retaining the money.
- Leaving the shortfall unexplained in the board’s report, which is an independent disclosure failure.
14. Checklist
Applicability, every year
- Net worth, turnover and net profit for the immediately preceding financial year computed
- Each tested separately against ₹500 crore, ₹1,000 crore and ₹5 crore — any one is enough
- Assessment repeated annually and diarised
- Pending amendment monitored, with the current ₹5 crore threshold applied until notification
Computing the spend
- Section 198 net profit computed for each of the three preceding financial years, documented
- Average taken and 2% calculated
- Where the result is nil or negative, the position recorded — procedural obligations still apply
- Where the amount does not exceed ₹50 lakh, the board discharges the committee functions
Spending it
- CSR policy adopted and approved by the board
- Activities mapped against Schedule VII, with brand and marketing elements excluded
- Implementing agency identified and its CSR-1 registration number verified and recorded
- Projects classified as ongoing or not, deliberately and at approval
- Programme started early enough in the year to be spent within it
- Utilisation certificates and supporting documentation obtained
Year end
- Actual spend reconciled against the obligation
- Unspent amounts on ongoing projects transferred to the Unspent CSR Account within 30 days of 31 March
- Unspent amounts on non-ongoing projects transferred to a Schedule VII fund within the prescribed period
- Shortfall and its reasons stated in the board’s report
- CSR annexure to the board’s report completed with project details and agency names
- Form CSR-2 filed
- Website disclosure updated where a website is maintained
Is your Indian subsidiary well capitalised but not yet profitable?
Then CSR may already apply through the net worth threshold, and the disclosure obligations run even where the spend computes to nil. Send us your Indian entity’s last audited balance sheet and we will tell you whether Section 135 applies, what the Section 198 computation produces, and what has to be in this year’s board report.
15. Frequently asked questions
Q1. Does CSR apply to foreign-owned Indian companies?
Yes. Section 135 applies to every company registered under the Companies Act, including subsidiaries of foreign parents, and to foreign companies with a branch or project office in India. There is no exemption for foreign ownership, for being a captive, or for being loss-making.
Q2. What are the thresholds?
Any one of three, tested 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. The thresholds are alternatives, not cumulative, so meeting any one brings the company into scope.
Q3. Can CSR apply to a loss-making company?
Yes, through the net worth threshold. A foreign group that capitalised its Indian subsidiary heavily can cross ₹500 crore of net worth while making no profit, and Section 135 then applies even though net profit is below ₹5 crore.
Q4. If we are loss-making, do we have to spend anything?
Probably not, but the obligation does not disappear. Applicability and spending are separate questions: applicability turns on the thresholds, while the amount is 2% of average Section 198 net profits over three years, which on nil or negative profits produces no spending obligation. The policy, board consideration and disclosure still apply.
Q5. Which period is used for the thresholds?
The immediately preceding financial year only, not a rolling average. Using three-year averages to test applicability is a common error. One year decides whether the section applies; three years decide how much is spent.
Q6. How is the 2% calculated?
On the average of the net profits of the three immediately preceding financial years, computed under Section 198 of the Companies Act. That figure is not the profit before tax in the accounts and not the taxable income in the return — it is a separate computation with prescribed credits and deductions.
Q7. Can we use the tax profit figure?
No. Using tax profit instead of the Section 198 computation is a recurring error. The computation should be prepared deliberately by someone who has done it before and documented, rather than lifted from the financial statements.
Q8. Is CSR assessed once or every year?
Every financial year. A company can be in scope one year and out the next, and if a threshold is met it must comply for the year in which it was met even if it falls below in the following year. Treat it as an annual calendar item.
Q9. Do we need a CSR Committee?
Where the amount required to be spent does not exceed ₹50 lakh, the requirement to constitute a committee does not apply and the board discharges those functions. For most foreign-owned subsidiaries newly crossing a threshold, a board-level process is the practical answer.
Q10. What can the money be spent on?
Only Schedule VII activities — a closed list covering areas such as eradicating hunger and poverty, education, gender equality, environmental sustainability, national heritage, armed forces veterans, rural development and contributions to specified funds.
Q11. Can our global community programme count?
Only the parts that qualify. Treating brand campaigns or customer promotions as CSR is a recurring error, and activity in the normal course of business or primarily benefiting the company’s own employees does not qualify. Map each element against Schedule VII rather than assuming the global label carries.
Q12. Can we fund our group’s own foundation?
No, if it is a foreign foundation. Implementing agencies must hold CSR-1 registration, and international organisations and foreign foundations cannot register. The Indian spend must go through the company itself, an Indian implementing agency with CSR-1 registration, an eligible Indian entity established by the group, or a Schedule VII fund.
Q13. How do we check an implementing agency?
Confirm and record the CSR-1 registration number before funds move. Unverified implementing agency names are among the disclosure failures that invite scrutiny, and an agency that turns out not to be registered leaves the spend ineligible after the money has gone.
Q14. What happens to money we do not spend?
It depends on the project. Unspent amounts relating to an ongoing project are transferred to a separate Unspent CSR Account within 30 days of the financial year end and must be spent within three financial years. Amounts not relating to an ongoing project are transferred to a Schedule VII fund.
Q15. What is the deadline for the transfer?
Thirty days from the financial year end for the Unspent CSR Account — so by 30 April for a year ending 31 March. This is the deadline most often missed, because it falls in the weeks immediately after the year end when nobody is thinking about CSR.
Q16. Is there a penalty for not transferring?
Yes, and it attaches to the failure to transfer separately from the underspend. Failure triggers a penalty of up to twice the unspent amount or ₹1 crore, whichever is lower. A company that underspends and transfers on time is in a materially better position than one that underspends and does nothing.
Q17. Why does the ongoing-project classification matter?
Because it decides whether the money stays under the company’s control for three more years or leaves permanently to a Schedule VII fund. Classify projects deliberately at approval and document the basis — reclassifying after the year end to justify retaining money is not a strong position.
Q18. What are the reporting obligations?
A CSR annexure to the board’s report covering policy, committee, amount, spend, projects, implementing agencies and any shortfall with reasons; Form CSR-2 filed with the Registrar; website disclosure of the policy and committee where a website is maintained; and disclosure in the financial statements.
Q19. What if we underspent — do we have to explain?
Yes. Where the full amount was not spent, the board’s report must state the reasons, and an absent shortfall justification is an independent disclosure failure from the shortfall itself. An honest explanation of a delayed project is a better record than silence.
Q20. What are the penalties for CSR non-compliance?
For the company, twice the unspent amount or ₹1 crore, whichever is lower. For every officer in default, one-tenth of the unspent amount or ₹2 lakh, whichever is lower, under Section 135(7) read with Section 135(8). Other violations, such as failure to constitute a committee, attract general penalty provisions.
Q21. Are directors personally exposed?
Yes. The regime was softened from criminal to civil in 2021, but personal liability remains real for directors and key managers. For a foreign-owned subsidiary, officers in default will include the resident director and any parent nominees on the Indian board.
Q22. Is the threshold changing?
A change is proposed. The Corporate Laws (Amendment) Bill, 2026 proposes increasing the net profit threshold from ₹5 crore to ₹10 crore while keeping net worth and turnover unchanged, and the 2% formula, Schedule VII and the penalties are unaltered. Until the Bill is passed and notified, the existing ₹5 crore threshold applies.
Related reading
- Statutory registers under the Companies Act — the wider secretarial obligations
- Resident director requirement under Section 149(3) — the officers carrying personal exposure
- Related party transactions under Section 188 — the other Companies Act obligation foreign groups miss
- Annual ROC filings in India — where CSR-2 and the board’s report sit
Talk to us before the year closes
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. CSR applicability assessment, Section 198 computation, policy drafting, implementing agency verification, unspent account transfers and the board report and CSR-2 disclosures — handled alongside the wider secretarial calendar, because the CSR annexure sits inside the annual filing.
How we usually start. Send us your Indian entity’s last audited financial statements. We come back with whether Section 135 applies and on which threshold, what the Section 198 computation produces, whether a committee is required, and what has to appear in this year’s board report.