CSR under Section 135: Applicability, Spending and 2026 SSE Route

Law and applicability

Companies Act section 135, Schedule VII and Companies (CSR Policy) Rules, 2014, including 2021 and May 2026 amendments.

CSR applies to qualifying companies based on statutory tests for the immediately preceding financial year. The Board and, where required, the CSR Committee must plan and oversee permissible projects. Unspent CSR funds do not have a single blanket treatment: ongoing and non-ongoing projects follow different bank-account and transfer routes. MCA expanded Schedule VII and CSR rules in May 2026 to enable an additional Social Stock Exchange route with conditions, including a 10% spending cap for that instrument under the applicable amendment.

Key statutory decision tests

• Test section 135 applicability using the preceding year thresholds: net worth ₹500 crore, turnover ₹1,000 crore or net profit ₹5 crore; apply the correct statutory definition of net profit.
• Calculate ordinary annual spend using 2% of the prescribed average net profits over the relevant years.
• Determine CSR committee requirement, Board-approved annual action plan and proper implementing-agency eligibility.
• Separately identify ongoing projects and required treatment of unspent balances and administrative overheads.
• For the 2026 Zero Coupon Zero Principal route, apply the specific permitted instrument, eligible non-profit, SSE process and 10% cap.

Practical step-by-step workflow

1. Prepare threshold and 2% working papers signed by finance and reviewed by the Board.
2. Approve an action plan with project budget, milestones and eligible execution route.
3. Reconcile payments to evidence of actual programme spend, monitoring and applicable impact assessment.
4. Track unspent balances, Board disclosures, CSR-2 and updated MCA instructions.

Important exceptions and higher-risk transactions

Corporate CSR calculations require care over the denominator as well as the expenditure. Calculate average net profits as defined for this purpose, not from EBITDA, cash balances or unaudited operating profit. The two-per-cent spend requirement, permissible Schedule VII activities, administrative overheads and implementing-agency route must be checked together. Verify that an implementing agency is eligible and has fulfilled mandatory MCA registration requirements before selecting it; an NGO’s charity-tax approval is a different regime.

Unspent balances require a project-by-project note. Each alleged “ongoing project” needs an appropriately approved multi-year project with milestones and monitoring, not a year-end relabelling of unused funds. Verify the applicable account transfer, carry-forward/set-off and disclosure provisions. For the May 2026 Social Stock Exchange amendment, the company should confirm the specific qualifying Zero Coupon Zero Principal instrument and funding limit and retain Board/project evidence; it is not equivalent to buying ordinary market securities.

CSR effectiveness should not be judged only by disbursement totals. For every funded project, the company should match the authorised Schedule VII purpose, agreed deliverables, implementation dates, finance releases, use-of-funds certificates and independent monitoring evidence. The Board should receive clear reporting on completion, reasons for delay and the legal treatment of unspent amounts. If a project uses the newly permitted SSE instrument route, require an explicit Board note showing how the NPO and instrument satisfy the amendment and how the prescribed percentage cap is observed. Do not label ordinary financial returns or donations made for promotional benefit as eligible CSR by default.

Worked professional example

How the rule works in real companies

CSR applicability generally tests whether the company crosses the statutory net-worth, turnover or net-profit thresholds in the immediately preceding financial year. Once covered, determine spending duty, board or committee governance route, permitted Schedule VII activities, implementing agency eligibility and treatment of unspent amounts. A project with multiple years of execution needs an approved ongoing-project plan to use the unspent CSR account mechanism.

A company’s calculated section 135 spending obligation is ₹24 lakh and it actually spends ₹18 lakh on eligible activities. The ₹6 lakh balance cannot simply be labelled “carry-forward CSR”. Classify whether it relates to an approved ongoing project; the applicable transfer recipient and timeline differ for ongoing and non-ongoing unspent amounts.

Threshold workings; section 198-linked profit calculations where applicable; board/committee minutes; CSR policy; approved project budgets; implementing agency credentials; utilisation certificates; impact-assessment analysis if triggered; CSR-2 reconciliation.

Documents to retain and reconcile

• Threshold / average-net-profit workpaper
• Board/CSR Committee minutes, policy and action plan
• Implementing agency eligibility, CSR registration and utilisation trail
• Project monitoring, transfer accounts, CSR disclosures and SRNs

Common mistakes to avoid

• Confusing CSR-1 agency registration with company CSR-2 filing
• Misclassifying routine business expenses as CSR
• Treating the new SSE option as unrestricted investment

Practical questions and answers

Statutory provisions and official references

• Companies Act, 2013 — MCA Act text (read with subsequent amendments)
• CSR Policy Amendment Rules, 2021 — MCA Gazette
• MCA CSR FAQ — General Circular No. 14/2021
• May 2026 CSR / zero-coupon-zero-principal amendments — MCA
• MCA — live circulars, forms and filing updates

Use the applicable amended provision and actual effective date for the transaction. Current MCA portal instructions and valid circulars govern web-form fields, fees and approved extensions.