Section 135 of the Companies Act, 2013 makes certain companies set up a CSR committee, adopt a CSR policy and spend at least two per cent of their average net profit of the last three years on activities in Schedule VII. If money is not spent, the board must explain why, and in many cases move it to a designated account or fund. Auditors check that each of these steps happened and that the numbers hold together.
Last reviewed: 17 October 2026. Facts checked. We opened the text of section 135 in the Companies Act, 2013 as published on indiacode.nic.in (a version that shows amendments up to 2020). We tried the MCA FAQ pages and the CSR Rules on indiacode and mca.gov.in, but they returned errors or connection failures, so we did not open the CSR Rules, Schedule VII or form CSR-2. We make no claim about those here. Law changes, so confirm the current text.
Who section 135 applies to
Section 135(1) applies to a company with any one of these in the immediately preceding financial year:
- net worth of rupees five hundred crore or more,
- turnover of rupees one thousand crore or more, or
- net profit of rupees five crore or more.
Check each test every year. Our CSR section 135 calculator helps with the arithmetic.
The committee
A covered company must form a CSR Committee of the Board with three or more directors, at least one independent. If the company does not need an independent director under section 149(4), two or more directors will do.
There is an exception in section 135(9). Where the amount to be spent does not exceed fifty lakh rupees, no committee is needed and the board performs its functions.
The committee must:
- formulate and recommend a CSR policy listing activities in areas in Schedule VII,
- recommend the amount to be spent, and
- monitor the policy from time to time.
The board's report must disclose the committee's composition.
The board's duties
Under section 135(4), the board approves the policy after considering the committee's recommendations, discloses its contents in the board's report, places it on the company's website (if it has one) in the manner prescribed, and ensures the policy's activities are carried out.
The spend
Section 135(5) says the board must ensure the company spends, in every financial year, at least two per cent of the average net profits of the preceding three financial years. For a company less than three years old, it uses the years available. Net profit is calculated under section 198, and the Act says certain prescribed sums are excluded.
Other points in the text:
- The company should give preference to the local area and areas around where it operates.
- Excess spend may be set off against requirements for succeeding years, in the manner prescribed.
Unspent amounts
| Situation | What the Act says |
|---|---|
| Unspent amount is not for an ongoing project | Board explains the reasons in its report and transfers the amount to a Schedule VII fund within six months of the end of the financial year |
| Unspent amount relates to an ongoing project | Transfer within thirty days of year end to a special Unspent CSR Account in a scheduled bank |
| Money in the Unspent CSR Account | Spend within three financial years of the transfer, or transfer to a Schedule VII fund within thirty days of the third financial year ending |
What qualifies as an "ongoing project" is set by the Rules, which we did not open.
Penalties
Section 135(7) says a company in default of subsection (5) or (6) is liable to a penalty of twice the amount that should have been transferred, or one crore rupees, whichever is less. Each officer in default is liable to one-tenth of the amount, or two lakh rupees, whichever is less.
What auditors check
These are practical checks, not a list taken from an auditing standard or rule, because we did not open any such source. They matter because CSR numbers and disclosures reach the board's report and the books. See also our CSR audit and Schedule VII guide.
| Area | Check |
|---|---|
| Applicability | Net worth, turnover and net profit tests for the preceding year |
| Committee | Composition and board report disclosure; or the section 135(9) position |
| Policy | Board approval, contents disclosed, website placement where applicable |
| Calculation | Average net profit of three years; adjustments under section 198 |
| Spend | Each project maps to a Schedule VII area; vouchers, payee details, utilisation evidence |
| Local preference | Evidence the area where the company operates was considered |
| Unspent | Correct transfer, in the right account, within the right time |
| Reporting | Board report matches the ledger and bank statements |
Quick checklist
- Run the three tests each year and record the result.
- Keep committee minutes for the policy, budget and monitoring.
- Compute the two per cent in a working paper with sources.
- Tie each rupee spent to a project and a Schedule VII area.
- Track unspent amounts with transfer dates.
- Reconcile the board report with the books before sign-off.
For related work on board records, see board meetings under the Companies Act.
Frequently Asked Questions
What is section 135?
It is the section of the Companies Act, 2013 on corporate social responsibility. It covers the committee, policy, spending and unspent amounts.
How much must a company spend?
At least two per cent of the average net profit of the three immediately preceding financial years, calculated under section 198.
Does every company need a CSR committee?
No. Section 135(1) sets thresholds. Where the amount to be spent does not exceed fifty lakh rupees, the board performs the committee's functions.
What happens to unspent CSR money?
For non-ongoing projects, it goes to a Schedule VII fund within six months of year end. For ongoing projects, it goes to the Unspent CSR Account within thirty days of year end.
Does the statutory auditor audit CSR spending?
Section 135 itself does not create a separate CSR audit. Auditors usually look at CSR figures and disclosures while auditing the financial statements. We did not open the CSR Rules, so check them for any extra requirement.
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