CSR Compliance Under Section 135: The Rs.40 Lakh Threshold, Form CSR-2, and the 2% Unspent Transfer Rule

Who Must Comply with CSR Under Section 135?

Section 135 of the Companies Act 2013 is not voluntary--it is a legal obligation. A company is mandated to constitute a CSR Committee and spend on CSR activities if it satisfies all three conditions in a financial year:

• Net worth Rs.500 crore, OR
• Turnover Rs.1,000 crore, OR
• Net profit Rs.5 crore

However, the government introduced a relief notification in March 2021 that exempts companies from CSR reporting (not the obligation itself) if their average net profit for the three preceding financial years does not exceed Rs.40 lakh. This Rs.40 lakh threshold is where most small companies fall out of the compliance net--but they still cannot undertake CSR expenditure without forming a CSR policy.

If your company crosses Rs.40 lakh average profit, you must file Form CSR-1 (CSR Policy registration) and Form CSR-2 (annual CSR report).

The 2% Spend Obligation

Once covered, your company must spend 2% of the average net profit of the three preceding financial years on CSR activities. This is not discretionary. The spend must be made during the financial year, and unspent amounts cannot simply be carried forward.

Example: If your average net profit (FY 2023-24, 2024-25, 2025-26) is Rs.10 crore, your CSR spend obligation for FY 2025-26 is Rs.20 lakh (2% of Rs.10 crore).

The New 2% Unspent Transfer Rule (2024 Amendment)

Historically, if a company could not spend its full CSR allocation, it had to deposit the unspent amount in a designated bank account or transfer it to a designated fund. This was administratively cumbersome and trapped capital.

The Companies (CSR Policy) Amendment Rules 2024 introduced a new provision: a company can now transfer up to 2% of its average net profit (i.e., the full CSR obligation amount) to a CSR fund or reserve account for implementation in the succeeding three financial years. This is a significant change:

• Before: Unspent CSR had to be transferred to a government fund immediately, creating compliance friction.
• After: You can park the unspent amount internally for planned multi-year CSR projects, provided it is deployed within three years.

The company must disclose this transfer in its CSR report (Form CSR-2) and track the utilisation separately. This rule applies to CSR unspent amounts for FY 2024-25 onwards.

Form CSR-2: Filing Mechanics and Common Pitfalls

Form CSR-2 is the Annual CSR Report and must be filed with the Registrar of Companies (ROC) within 30 days of the company's annual general meeting (AGM) being held.

Key fields in Form CSR-2:

• Name and DIN of CSR Committee members.
• Average net profit for the three preceding years.
• CSR obligation (2% of average net profit).
• Amount spent during the financial year, broken down by activity and beneficiary category.
• Amount unspent (if any) and where it was deposited or transferred.
• Reason for shortfall (if CSR spend is less than obligation).
• Director certification and Board approval.

Common mistakes:

• Filing Form CSR-2 before the AGM is held (the report is part of the Board's annual report, which must be approved at the AGM).
• Failing to disclose unspent amounts separately; the CSR Committee Chair must explain the shortfall.
• Spending on activities that do not fall within Schedule VII of the Companies Act (e.g., staff training, employee wellness, political donations--these are not CSR).
• Not maintaining supporting documentation: invoices, beneficiary acknowledgments, impact assessments, bank transfer proofs.

CSR Activities: What Qualifies?

Not all charitable work is CSR under Section 135. The activity must fall within Schedule VII of the Companies Act 2013. Permissible categories include:

• Eradicating hunger, poverty, and malnutrition.
• Promotion of education, including vocational skill development.
• Healthcare, sanitation, and water resources.
• Animal welfare.
• Environmental sustainability and climate change.
• Heritage and cultural conservation.
• Rural development and infrastructure.
• Promotion of sports and contributions to the Prime Minister's Relief Fund, National Disaster Management Fund, or other statutory relief funds.

In-house CSR is not permitted unless the company is a research-driven entity operating in Schedule VII sectors. Spending on employee salaries, corporate overheads, or event sponsorships does not count.

Consequences of Non-Compliance

Failure to spend the mandated CSR amount or file Form CSR-2 attracts penalties:

• Directors: Fine up to Rs.50,000 and/or imprisonment up to 3 years (Section 135(5)).
• Company: Fine up to Rs.50,000 (Section 135(5)).

The Ministry of Corporate Affairs actively monitors CSR filings via the e-Governance portal. Discrepancies invite show-cause notices.

Practical Compliance Checklist

• Verify your company's average net profit to confirm Section 135 applicability (Rs.40 lakh threshold for relief).
• If applicable, register Form CSR-1 with ROC (one-time, valid for three years unless amended).
• Calculate your CSR obligation (2% of average net profit) by 15th April of the financial year.
• Identify qualifying activities and beneficiaries under Schedule VII.
• Document all expenditures: invoices, bank statements, beneficiary confirmations, impact reports.
• If unspent, decide whether to transfer to a CSR fund (new rule) or deposited account (old rule).
• File Form CSR-2 within 30 days of the AGM with full disclosures and Board sign-off.
• Maintain records for seven years.

CSR compliance is not a one-time exercise--it is an annual obligation tied to profitability and auditable via ROC filings. The 2% unspent transfer rule has made multi-year CSR planning more attractive, but execution discipline remains critical.

I'm CA Harun Raaj, Visakhapatnam. If your company straddles the CSR threshold or has unspent balances to manage, let's structure your CSR strategy to meet compliance and maximise impact.

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