Will CSR ever apply to your startup? Section 135 triggers, the 2% spend and unspent money

Most startups will never touch section 135. The ones that cross it can be caught unprepared, because the test looks back at the previous year. The Corporate Social Responsibility (CSR) provision applies when a company meets any one of three 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 (s.135(1)). From then on the board must put a policy in place, spend at least two per cent of average net profit each year (s.135(5)), and deal with any unspent balance in a set way (s.135(5)-(6)). Defaults carry penalties on the company and on its officers in default (s.135(7)).

Legal basis: Companies Act 2013, s.135 (read with Schedule VII and s.198).

What to do now

• Test the trigger every year, on the previous year's audited numbers. Check net worth, turnover and net profit for the immediately preceding financial year (s.135(1), Companies Act 2013). Meeting any one is enough. Compute "net profit" under s.198, not from the bottom line of the profit and loss account (Explanation to s.135).
• If the section applies, set up the committee or record why the board is doing the job. The committee has three or more directors including one independent director, or two or more directors if the company need not appoint an independent director under s.149(4) (s.135(1) and proviso). Where the amount to be spent under s.135(5) does not exceed ₹50 lakh, there is no committee requirement and the board performs its functions (s.135(9)).
• Mind the three unspent-money clocks. Unspent money that is not for an ongoing project must go to a Schedule VII Fund within six months of the end of the financial year (s.135(5), second proviso). Unspent money for an ongoing project goes to the Unspent Corporate Social Responsibility Account within thirty days of the end of the financial year (s.135(6)). The Account balance must be spent within three financial years, failing which it goes to a Schedule VII Fund within thirty days of the completion of the third financial year (s.135(6)).
• Consequence of default. The company faces a penalty of twice the amount that should have been transferred or ₹1 crore, whichever is less. Each officer in default faces one-tenth of that amount or ₹2 lakh, whichever is less (s.135(7)).

Have a CA review your facts before you act or file.

The three triggers: net worth, turnover or profit

Section 135(1) applies to "every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more" in the immediately preceding financial year. Any single test is enough. A startup does not need to be large to be caught: one year of ₹5 crore net profit meets the smallest test.

"Net profit" has a specific meaning here. The Explanation to s.135 says it excludes "such sums as may be prescribed" and is calculated in accordance with s.198. Use the audited figure computed on that basis, not an estimate.

The committee, and when the board does the job

A company covered by s.135(1) must constitute a CSR Committee of the Board of three or more directors, at least one of whom is an independent director. The proviso reduces this to two or more directors where the company is not required to appoint an independent director under s.149(4).

The composition of the committee is disclosed in the Board's report under s.134(3) (s.135(2)).

Section 135(9) gives a relief. Where the amount to be spent under s.135(5) does not exceed ₹50 lakh, the committee requirement in s.135(1) does not apply, and the functions of the committee are discharged by the Board of Directors. The relief is measured on the amount to be spent, not on the thresholds.

Policy, spend and local preference

The committee's job under s.135(3) is to:

• formulate and recommend to the Board a CSR Policy indicating the activities to be undertaken in areas or subjects specified in Schedule VII;
• recommend the amount of expenditure on those activities; and
• monitor the policy from time to time.

The Board then, under s.135(4), approves the policy after taking into account the committee's recommendations, discloses its contents in the Board's report, places it on the company's website, if any, in the prescribed manner, and ensures the activities in the policy are undertaken.

The spend rule is in s.135(5). The Board must ensure the company spends, in every financial year, at least two per cent of the average net profits made during the three immediately preceding financial years. Where the company has not completed three financial years since incorporation, the average is taken over the immediately preceding financial years it does have. The first proviso asks the company to give preference to the local area and areas around it where it operates.

Unspent money: explain, and transfer

If the company fails to spend the amount, the Board must specify the reasons in its report under s.134(3)(o). Unless the unspent amount relates to an ongoing project referred to in s.135(6), the Board must also transfer it to a Fund specified in Schedule VII within six months of the end of the financial year (s.135(5), second proviso).

If the company spends more than required, the third proviso lets it set off the excess against the spending requirement for succeeding financial years, for such number of years and in such manner as may be prescribed. The prescribed period and manner sit in the CSR Policy Rules, 2014 as amended; confirm the current rule text before you rely on any carry-forward.

Ongoing projects: the Unspent CSR Account

Section 135(6) deals with an amount remaining unspent under s.135(5) "pursuant to any ongoing project, fulfilling such conditions as may be prescribed". Three steps follow:

• The company transfers it, within thirty days from the end of the financial year, to a special account opened for that financial year in any scheduled bank, called the Unspent Corporate Social Responsibility Account.
• The company spends it under its CSR Policy within three financial years from the date of the transfer.
• Failing that, it transfers the balance to a Fund specified in Schedule VII within thirty days from the completion of the third financial year.

What counts as an "ongoing project" is left to the prescribed conditions. Those conditions are in the CSR Policy Rules, as amended, so check the current rules before treating a project as ongoing.

The Schedule VII boundary

The policy must indicate activities "in areas or subject, specified in Schedule VII" (s.135(3)(a)). Schedule VII is the list the policy has to draw from. Map each proposed activity to an entry in Schedule VII before the board approves the policy, and keep that mapping on file. Whether a particular spend qualifies depends on the wording of the Schedule and the current CSR Policy Rules, which is a point to settle with your CA before you commit funds.

Penalties

Section 135(7) applies where a company is in default in complying with s.135(5) or s.135(6):

• the company is liable to a penalty of twice the amount required to be transferred to the Schedule VII Fund or the Unspent CSR Account, as the case may be, or ₹1 crore, whichever is less; and
• every officer of the company in default is liable to a penalty of one-tenth of that amount, or ₹2 lakh, whichever is less.

Separately, under s.135(8) the Central Government may give general or special directions to a company or class of companies to ensure compliance, and the company must comply.

A worked example

Take a company incorporated in FY 2025-26 that makes a net profit, computed under s.198, of ₹6 crore in that first year. This is an illustration with assumed numbers, not a forecast.

• Trigger. Net profit of ₹5 crore or more in the immediately preceding financial year brings s.135 into play for FY 2026-27 (s.135(1)).
• Spend. The company has not completed three financial years since incorporation, so the average is taken over the immediately preceding financial year or years it has. On those assumed numbers, two per cent of ₹6 crore is ₹12 lakh to be spent in FY 2026-27 (s.135(5)). A company with a longer history averages three years, and a loss-making year inside that window pulls the average down.
• Committee. The amount to be spent, ₹12 lakh, does not exceed ₹50 lakh, so the committee requirement does not apply and the Board discharges the committee's functions (s.135(9)). The Board still has to approve a Schedule VII policy, disclose it in its report and place it on the website, if any (s.135(4)).
• Unspent. Suppose a multi-year project is left partly unspent at year end. If it qualifies as an ongoing project under the prescribed conditions, the unspent amount moves to the Unspent CSR Account within thirty days of the year end, and three financial years run from the transfer (s.135(6)). If it is not an ongoing project, the Board explains in its report and transfers the balance to a Schedule VII Fund within six months (s.135(5)).

The trigger year is the planning year. Policy, Schedule VII mapping and project pipeline should exist before the spend year begins.

Why the s.198 number can differ from book profit

The Explanation to s.135 routes net profit through s.198, which is written for the purposes of s.197. Section 198 does not simply follow the profit and loss account. For example, it does not give credit for profits of a capital nature, including profits from the sale of an undertaking (s.198(3)(c)), or for unrealised gains, notional gains or revaluation of assets (s.198(3)(f)). It does give credit for bounties and subsidies received from any Government or authorised public authority, unless the Central Government otherwise directs (s.198(2)). It also deducts items such as directors' remuneration (s.198(4)(b)).

So the same year can show a different figure under s.198 than in the accounts, and that figure decides whether the ₹5 crore threshold is met and what two per cent is applied to. Run the s.198 computation first and keep the working. The cheapest CSR compliance is a documented computation showing the section does not apply.

How the CSR file should read

A tidy s.135 file for a year in which the section applies holds:

• the preceding-year computation of net worth, turnover and net profit (s.198 basis);
• the committee constitution, or a note that s.135(9) applies and the Board discharges the functions;
• the Board-approved Schedule VII policy and evidence of website placement;
• the two per cent computation and evidence of local preference;
• the unspent-money records: the six-month Fund transfer, or the thirty-day Account transfer with its three-year spending record; and
• any set-off record for excess spending in earlier years.

Frequently asked questions

Which companies does section 135 apply to?
A company that, in the immediately preceding financial year, had net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more. Any one is enough (s.135(1)).

Is a CSR committee always required?
No. The default is three or more directors including an independent director. The proviso allows two or more directors where no independent director is required (s.135(1)). Where the amount to be spent under s.135(5) does not exceed ₹50 lakh, no committee is required and the Board discharges its functions (s.135(9)).

How much must be spent?
At least two per cent of the average net profits of the three immediately preceding financial years, or of the years available for a company that has not completed three years since incorporation, with preference to the local area (s.135(5)).

What happens to unspent money?
The Board gives reasons in its report and transfers the amount to a Schedule VII Fund within six months of the end of the financial year, unless it relates to an ongoing project. Ongoing-project money goes to the Unspent CSR Account within thirty days (s.135(5) and (6)).

Can excess spending be carried forward?
Yes, it may be set off against the requirement for succeeding financial years, in the manner and for the number of years prescribed (s.135(5), third proviso).

What do defaults cost?
The company: twice the amount to be transferred or ₹1 crore, whichever is less. Each officer in default: one-tenth of that amount or ₹2 lakh, whichever is less (s.135(7)).

Where must the policy be published?
Its contents are disclosed in the Board's report and it is placed on the company's website, if any, in the prescribed manner (s.135(4)(a)).

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See Also

• How to Set Up an ESOP Scheme in a Private Limited Company
• Director Duties and Automatic Vacation of Office: Sections 166 and 167
• Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40