Finin2minCompanies Act Professional Series
SC07 - Schedule VII - CSR Activities
A complete governance, project, spending, accounting, unspent-fund, reporting and assurance framework for section 135 of the Companies Act, Schedule VII and the Companies (Corporate Social Responsibility Policy) Rules.
3 Thresholds
Net worth, turnover or net profit
Net worth, turnover or net profit
2% Spend
Average net profits of preceding years
Average net profits of preceding years
12 Areas
Schedule VII statutory subjects
Schedule VII statutory subjects
10 Rules
Applicability to website disclosure and transfer
Applicability to website disclosure and transfer
Executive map
The CSR compliance chain
Core principle: A socially useful payment is not automatically CSR. It must pass the Schedule VII purpose test, Rule 2 exclusions, governance approval, execution eligibility, utilisation evidence and reporting controls.
Section 135(1)
Applicability thresholds
| Immediately preceding financial year | Threshold | Result |
|---|---|---|
| Net worth | Rs. 500 crore or more | Meeting any one threshold brings the company into section 135 for the relevant year. |
| Turnover | Rs. 1,000 crore or more | |
| Net profit | Rs. 5 crore or more |
Individual-company test
A holding or subsidiary is not covered merely because another group entity qualifies. Each entity applies its own statutory figures, while a qualifying foreign company with an Indian branch/project office also follows the Rules.
Unspent-account continuation
A company carrying any balance in an Unspent CSR Account must maintain the specific CSR Committee and compliance framework required by the current Rule 3 proviso.
Governance
CSR Committee and Board routes
| Company situation | Governance structure | Key point |
|---|---|---|
| Company required to appoint independent director | Three or more directors, including at least one independent director. | Board report discloses composition. |
| Company not required to appoint independent director | Two or more directors. | Use the section 135 proviso. |
| Private company with only two directors | Those two directors may constitute the committee, subject to the Act and facts. | Do not create a fictitious third seat. |
| Foreign company | At least two persons, including the India-authorised person under section 380 and one nominee of the foreign company. | Coordinate Indian reporting and global approvals. |
| Annual CSR amount does not exceed Rs. 50 lakh | Board ordinarily discharges Committee functions under section 135(9). | Separately test the Unspent CSR Account proviso. |
Committee/Board responsibilities
- Formulate and recommend CSR Policy.
- Recommend expenditure and annual action plan.
- Monitor projects and policy.
- Review implementation and impact-assessment requirements.
- Place the full decision trail before the Board.
Section 135(5)
Compute the CSR obligation
Annual obligation: 2% of average net profits of the three immediately preceding financial years, or the available immediately preceding years for a company that has not completed three financial years since incorporation.
| Computation control | Professional approach |
|---|---|
| Profit base | Use section 198 principles and the prescribed CSR exclusions, not accounting PAT without reconciliation. |
| Overseas branch profit | Exclude the prescribed overseas-branch profit from the CSR net-profit base. |
| Dividend from compliant Indian company | Apply the prescribed exclusion where the dividend is received from another Indian company covered by and complying with section 135. |
| Negative average | The 2% mathematical amount cannot be negative; document the computation and Board conclusion. |
| Local area | Preference is given to local areas around operations, but project selection should still be need-based and within Schedule VII. |
Example: Section 198 CSR net profits of Rs. 20 crore, Rs. 30 crore and Rs. 40 crore produce an average of Rs. 30 crore. Annual CSR obligation = Rs. 60 lakh.
Schedule VII
Complete statutory subject map
| Item | Area or subject |
|---|---|
| i | Hunger, poverty, malnutrition, healthcare including preventive healthcare, sanitation and safe drinking water; including the stated sanitation fund contribution. |
| ii | Education, special education, employment-enhancing vocational skills and livelihood-enhancement projects, especially for specified vulnerable groups. |
| iii | Gender equality, women empowerment, homes/hostels for women and orphans, senior-citizen facilities and reduction of inequalities faced by backward groups. |
| iv | Environmental sustainability, ecological balance, flora and fauna, animal welfare, agroforestry, natural-resource conservation and quality of soil, air and water; including the stated Clean Ganga Fund contribution. |
| v | National heritage, art and culture, restoration of historic buildings/sites and works of art, public libraries, traditional arts and handicrafts. |
| vi | Measures for armed-forces veterans, war widows and their dependants. |
| vii | Training to promote rural, nationally recognised, Paralympic and Olympic sports. |
| viii | Contribution to PMNRF, PM CARES or other specified Central Government funds for socio-economic development, relief and welfare of specified groups. |
| ix | Specified incubators, public-funded universities, laboratories and government-supported science, technology, engineering and medical research aimed at SDGs. |
| x | Rural-development projects. |
| xi | Slum-area development, with slum area determined under applicable government/authority declaration. |
| xii | Disaster management, including relief, rehabilitation and reconstruction. |
Interpretation: Schedule VII is read liberally to capture the essence of the listed subjects, but it does not override the explicit Rule 2 exclusions or implementation controls.
Eligibility screen
Eligible, excluded and high-risk activity
| Generally excluded | Reason | Illustration |
|---|---|---|
| Normal course of business | CSR cannot ordinarily be ordinary commercial activity. | A hospital charging normal patients cannot label routine operations as CSR. |
| Outside India | Geographical exclusion, subject to the narrow sports-training exception. | General overseas disaster donation does not qualify under the normal rule. |
| Political contribution | Section 182 payment is expressly excluded. | Contribution to a political party is not CSR. |
| Employee-exclusive benefit | CSR must primarily serve the wider public/community. | Health insurance only for employees and families is not CSR. |
| Sponsorship/marketing | Activity designed to derive marketing benefit is excluded. | Brand-led event sponsorship with product promotion is not CSR. |
| Statutory obligation | CSR cannot replace legal compliance expenditure. | Mandatory pollution-control equipment is not CSR. |
Rules 1-10
Rule-by-rule professional register
| Rule | Subject | Current control |
|---|---|---|
| Rule 1 | Short title and commencement | Companies (Corporate Social Responsibility Policy) Rules, 2014 operate with section 135 and Schedule VII. |
| Rule 2 | Definitions and exclusions | Defines administrative overheads, CSR, policy, international organisation, ongoing project and public authority; excludes specified normal-business, employee, political, marketing, overseas and statutory-obligation activity. |
| Rule 3 | Applicability | Applies where section 135 criteria are met. A balance in the Unspent CSR Account creates a specific committee/compliance continuation requirement. |
| Rule 4 | Implementation | Direct execution or eligible CSR-1 implementing entity; separate reporting for collaboration; Board responsibility and utilisation certification continue. |
| Rule 5 | Committee and policy | Annual action plan lists projects, execution, fund-use modalities, schedules, monitoring and impact assessment; Board may alter on justified recommendation. |
| Rule 6 | Omitted | Do not use obsolete standalone rule wording as the current control source. |
| Rule 7 | CSR expenditure | 5% administrative-overhead cap; surplus treatment; three-year excess set-off; permitted capital-asset holders. |
| Rule 8 | Reporting and impact assessment | Annual CSR reporting and independent impact-assessment framework, including the separate cost cap. |
| Rule 9 | Website disclosure | Disclose committee composition, policy and Board-approved projects on the website, if any. |
| Rule 10 | Unspent transfer | Until a separate fund is specified, use a fund included in Schedule VII for the statutory transfer route. |
Rule 4
Implementing agencies and CSR-1
| Eligible route | Essential conditions |
|---|---|
| Entity established by the company alone or with another company | Specified section 8 company, registered public trust or registered society with required tax registrations. |
| Entity established by Central or State Government | Specified section 8 company, registered public trust or registered society under the government route. |
| Statutory entity | Entity established under an Act of Parliament or State Legislature. |
| Independent experienced entity | Specified section 8 company, registered public trust or registered society with required tax registrations and at least three years' track record in similar activities. |
- Eligible implementing agencies register electronically in Form CSR-1 and receive a CSR Registration Number.
- The company remains accountable; releasing funds does not complete the CSR obligation.
- An international organisation may support design, monitoring, evaluation and capacity building, but is not automatically an eligible implementing agency.
- Companies may collaborate, but each company must report its own share and satisfy its own Board.
- The Board must satisfy itself that disbursed funds were used as approved, supported by CFO or responsible-person certification.
Release-control failure: Paying a charitable body without verifying CSR-1, entity category, 12A/80G status where required, project agreement, milestones and utilisation evidence.
Rule 5
Annual action plan
Project list
Schedule VII mapping, location, beneficiaries, objectives and budget.
Execution
Direct or implementing agency, milestones and fund-release model.
Monitoring
Output/outcome indicators, reporting frequency, verification and impact assessment.
The Board may alter the annual action plan during the year on a justified recommendation of the CSR Committee. The project file should preserve the reason, revised budget, timeline and impact on unspent classification.
Rule 7
CSR expenditure controls
| Area | Rule | Control |
|---|---|---|
| Administrative overheads | Not more than 5% of total CSR expenditure for the financial year. | Separate general CSR-function management cost from direct project cost. |
| Surplus | Not business profit. | Plough back into same project, move to Unspent CSR Account for that project, or transfer to a Schedule VII fund within six months. |
| Excess spend | May be set off against the next three financial years. | Exclude CSR surplus and pass a Board resolution. |
| Capital asset | Permitted only with an eligible holder. | Holder can be an eligible CSR-registered entity, project beneficiaries through permitted collectives/entities, or a public authority. |
Administrative-overhead example: Total CSR expenditure Rs. 2 crore; maximum administrative overhead Rs. 10 lakh. Direct project-management staff working exclusively on the project may be a direct project cost rather than general administrative overhead, subject to evidence.
Excess-spend example: Obligation Rs. 1 crore and qualifying spend Rs. 1.30 crore, with no surplus component. Rs. 30 lakh can be considered for set-off over the next three years after Board resolution.
Section 135(6)
Ongoing project and unspent amount
| Question | Answer |
|---|---|
| What is an ongoing project? | A multi-year project with a timeline not exceeding three years excluding the financial year in which it commenced; an initially non-ongoing project can be extended by the Board on reasonable justification within the permitted period. |
| Ongoing-project unspent amount | Transfer to a separate Unspent CSR Account within 30 days from financial-year end. |
| Spending window | Spend in pursuance of the CSR obligation within three financial years from transfer. |
| Still unspent after third year | Transfer to a Schedule VII fund within 30 days from completion of the third financial year. |
| Non-ongoing unspent amount | Transfer to a Schedule VII fund within six months from financial-year end. |
Timeline example: For year ended 31 March, an ongoing-project balance is ordinarily transferred by 30 April. A non-ongoing unspent balance is ordinarily transferred by 30 September.
Rule 8
Impact assessment
Trigger: Average CSR obligation of Rs. 10 crore or more in the three immediately preceding financial years + project outlay of Rs. 1 crore or more + project completed at least one year before the study.
- Assessment is undertaken through an independent agency.
- Report is placed before the Board and annexed to the annual CSR report.
- Assessment expenditure bookable as CSR is capped at 2% of total CSR expenditure for that financial year or Rs. 50 lakh, whichever is higher.
- Utilisation certificate and impact assessment serve different purposes.
Example: A Rs. 1.5 crore project completed six months ago does not yet meet the one-year completion condition, even if the company's average obligation exceeds Rs. 10 crore.
Reporting and disclosure
Board report, website, financial statements and MCA forms
| Output | Core content | Reconciliation control |
|---|---|---|
| Board's Report annual CSR report | Committee, policy, obligation, project spend, unspent amounts, transfers, impact assessment and responsibility statement in the prescribed format. | Agree with ledgers, bank transfers and project records. |
| Website, if any | CSR Committee composition, CSR Policy and Board-approved projects. | Same project names and budgets as annual action plan. |
| Financial statements | Schedule III CSR disclosures: required amount, spend, shortfall, previous shortfall, reason, nature of activity and related-party movement where relevant. | Agree unspent account and fund transfers. |
| CSR-1 | Registration of eligible implementing agency. | Verify registration number before release. |
| CSR-2 | Structured annual MCA CSR reporting under the Companies (Accounts) Rules and current portal workflow. | Reconcile with Board report, financial statements and website. |
Form control: MCA web-form architecture and filing linkage can change. Confirm the current CSR-2 schema, due-date workflow and attachments at the time of filing.
Penalty exposure
Failure to transfer statutory unspent amounts
| Person | Penalty |
|---|---|
| Company | Twice the amount required to be transferred or Rs. 1 crore, whichever is less. |
| Officer in default | One-tenth of the amount required to be transferred or Rs. 2 lakh, whichever is less. |
The Central Government may also issue general or special directions to secure compliance.
Practical cases
Ten decision scenarios
Case 1 - threshold: Net worth Rs. 300 crore, turnover Rs. 850 crore, net profit Rs. 7 crore in the immediately preceding year. CSR applies because any one threshold is enough.
Case 2 - Rs. 40 lakh obligation: Board may perform CSR Committee functions under section 135(9), unless the Unspent CSR Account proviso requires a Committee.
Case 3 - employee-only clinic: A clinic restricted to employees and families is excluded; opening it substantially to the community requires evidence and project design.
Case 4 - branded marathon: Sponsorship designed for advertising and marketing benefit is excluded even if the event has a social theme.
Case 5 - school building: A capital asset can qualify, but legal title must vest with a permitted holder and the project must map to Schedule VII.
Case 6 - direct NGO donation: A general corpus donation without project linkage and eligible implementation controls is high risk and should not be treated as completed CSR spend.
Case 7 - ongoing project: Balance at year-end goes to the project-specific Unspent CSR Account within 30 days, not directly to a Schedule VII fund.
Case 8 - non-ongoing shortfall: Transfer to Schedule VII fund within six months; merely explaining the shortfall is not sufficient.
Case 9 - impact assessment: Company average obligation Rs. 12 crore, project outlay Rs. 80 lakh. No mandatory project assessment because project outlay is below Rs. 1 crore.
Case 10 - excess spend: Excess attributable to project surplus is not available for set-off; only qualifying excess funded by the company can be carried forward after Board resolution.
Audit and Board checklist
Year-end control file
Legal and governance
- Threshold and section 198 computation
- Committee composition or Board route
- Policy and annual action plan
- Board and Committee minutes
- Schedule VII and exclusion memo
- CSR-1 and agency due diligence
Finance and assurance
- Project agreements and milestone releases
- Separate project ledgers/bank evidence
- CFO utilisation certification
- Administrative-overhead calculation
- Surplus and excess-spend analysis
- Unspent transfers and bank confirmation
- Impact assessment and CSR-2 reconciliation
Top red flags
| Red flag | Why it matters |
|---|---|
| Spend recorded on cheque issue without utilisation evidence | Disbursement alone does not establish approved utilisation. |
| Agency CSR-1 obtained after release | Eligibility should be established before implementation funding. |
| Project described broadly as donation | Schedule VII mapping, outcomes and monitoring may be missing. |
| Unspent amount retained in ordinary bank account | Ongoing-project balance requires a special Unspent CSR Account. |
| Website, annual report and CSR-2 differ | Creates a direct compliance and audit inconsistency. |
Q&A
Finin2min quick answers
Is local-area spending compulsory?
The Act requires preference, not an absolute geographical restriction. The Board should document its needs-based decision.
The Act requires preference, not an absolute geographical restriction. The Board should document its needs-based decision.
Can CSR be spent through any NGO?
No. The entity and project route must satisfy Rule 4 and CSR-1 requirements.
No. The entity and project route must satisfy Rule 4 and CSR-1 requirements.
Does a utilisation certificate replace impact assessment?
No. Utilisation addresses fund use; impact assessment evaluates outcomes and is triggered separately.
No. Utilisation addresses fund use; impact assessment evaluates outcomes and is triggered separately.
Can CSR surplus be credited to other income?
No. The Rules specify reinvestment or transfer routes.
No. The Rules specify reinvestment or transfer routes.
Can excess spend be carried forward indefinitely?
No. Qualifying excess may be set off against the next three financial years, subject to conditions and Board resolution.
No. Qualifying excess may be set off against the next three financial years, subject to conditions and Board resolution.
Primary sources
Source register
1. Companies Act, 2013, section 135 and Schedule VII - India Code consolidated text: https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf
2. Ministry of Corporate Affairs - current Companies (Corporate Social Responsibility Policy) Rules, Companies (Accounts) Rules, notifications, circulars and MCA V3 forms: https://www.mca.gov.in/
3. MCA General Circular No. 14/2021 - FAQs on CSR, read with later amendments and current portal requirements.
Professional-use note: This handbook is educational. Verify the current consolidated Rules, notifications, form schema, direct-tax treatment, project agreements and company-specific facts before action.