Corporate Social Responsibility Compliance in India: Applicability for Foreign Subsidiaries

India became the first major economy to make corporate social responsibility spending a compulsion through law. Section 135 of the Companies Act 2013 has been in force since April 1, 2014, and has made CSR into a statutory obligation with penalties attached. For foreign companies operating through Indian subsidiaries, CSR compliance India is not a question of corporate values or stakeholder optics. It is a legal compliance requirement under the Companies Act with monetary penalties for non-compliance. The obligation either exists or it does not, based on whether the company crosses any one of three financial thresholds in the immediately preceding financial year. When it exists, the only question is how to discharge it correctly.

Who Does Section 135 Companies Act CSR Apply To?

CSR under Section 135 of the Companies Act 2013 applies to every company registered in India that meets any one of three thresholds in the immediately preceding financial year: net worth of Rs. 500 crore or more, turnover of Rs. 1,000 crore or more, or net profit of Rs. 5 crore or more. Meeting even one criterion is sufficient to trigger the obligation for the following financial year. Foreign subsidiaries incorporated as Private or Public Limited Companies are covered in exactly the same way as domestically promoted companies. The scope is deliberately wide. All company types registered under the Companies Act are covered: private companies, listed and unlisted public companies, Section 8 companies, and foreign companies with a branch or project office in India. LLPs, partnership firms, and sole proprietorships fall outside Section 135 entirely. For foreign multinationals with multiple Indian subsidiaries, an important structural point: if a multinational has multiple subsidiaries in India, these are not aggregated for the purpose of calculating the Section 135 compliance thresholds. Only the subsidiaries that individually meet the thresholds as follows:

• Net worth of ₹500 crore or more; 
• Turnover of ₹1,000 crore or more; or 
• Net profit of ₹5 crore or more.

are subject to Section 135. A group with three Indian subsidiaries where two meet the threshold and one does not have two entities with CSR obligations and one without. The assessment is made on the immediately preceding financial year, not a rolling average. If a company crosses any one threshold in FY 2024-25, CSR provisions apply for FY 2025-26. Once triggered, the obligation continues until the company fails to meet all three thresholds for three consecutive financial years. A company that crossed the net profit threshold in one year and fell below it the next does not automatically exit the CSR compliance India regime. The Companies (Amendment) Bill, 2025, currently pending, proposes lowering the thresholds to net worth of Rs. 100 crore, turnover of Rs. 500 crore, or net profit of Rs. 3 crore. If enacted, this would bring a significantly larger number of mid-sized foreign subsidiaries into the CSR net. Until the Bill is passed and notified, the existing thresholds apply.

How Is the 2% CSR Spending Obligation Calculated?

Once CSR applicability is triggered, the company must spend at least 2% of the average net profits of the three immediately preceding financial years on CSR activities. Net profit for this calculation is determined under Section 198 of the Companies Act, not the accounting net profit shown in the financial statements. The two figures are not the same, and using the wrong one is the most common computational error in CSR compliance India. Section 198 net profit excludes:

• Capital gains and losses
• Dividend received from another company in India that is itself required to comply with Section 135Profits or losses from the sale of undertakings
• Depreciation calculated under the Income Tax Act (Companies Act depreciation must be used)
• Any amounts set aside for payment of tax

The most common error is including dividend income from Indian subsidiaries in the net profit figure. Section 198 explicitly excludes this. Another frequent mistake is using depreciation calculated under the Income Tax Act instead of the Companies Act. Where a company has not completed three financial years since incorporation, the average net profit is computed based on the immediately preceding financial year(s) available. . A company in its first year of CSR applicability uses only the preceding year’s net profit without averaging. Surplus CSR spending from prior years can be set off against future obligations. If a company spends Rs. 30 lakh against a Rs. 20 lakh obligation, the Rs. 10 lakh excess offsets future years. This surplus set-off facility, introduced by the 2021 amendment, provides flexibility in years where larger or multi-year projects result in spending above the annual obligation.

What Activities Qualify Under CSR Compliance in India?

Eligible CSR activities are prescribed in Schedule VII of the Companies Act 2013. Schedule VII has been amended several times since 2014 to reflect evolving national priorities. The list covers education, healthcare, environmental sustainability, rural development, gender equality, clean water and sanitation, heritage and culture, rural sports, technology incubators, disaster relief, and slum area development, among others. Activities outside Schedule VII do not qualify regardless of how socially beneficial they may be. Specific exclusions that catch foreign subsidiaries:

• Activities benefiting only company employees and their families do not qualify. A health programme for Indian employees and their dependents is an HR initiative, not CSR.
• Activities undertaken in the normal course of business, including Sponsorship of events for marketing, advertising, or brand visibility purposes does not qualify even if the event has a social dimension.
• Political contributions under Section 182 do not qualify.
• Activities outside India do not qualify. A foreign parent’s global CSR programmes, however extensive, cannot be claimed against the Indian subsidiary’s Section 135 obligation.
• CSR activities must be in India, but they need not be in the specific state or district where the company operates. The statute includes a preference for local areas where the company has operations, but this is a preference, not a restriction.

The implementing entity matters. CSR spending through a registered Trust, Society, or Section 8 company requires that implementing entity to be registered on the MCA portal by filing Form CSR-1. MCA revised the CSR-1 registration form with effective changes from July 14, 2025. The form can no longer be downloaded as a PDF and must be submitted in a fully web-based format on the MCA21 portal. Companies implementing CSR directly, without an external implementing partner, do not need to file CSR-1 themselves, but any external implementing agency they use must have a valid CSR-1 registration.

What Are the Structural Compliance Requirements Beyond Spending?

Once CSR becomes applicable, the Board must constitute a CSR Committee, formulate a CSR Policy, and begin spending from the year of applicability. The CSR Committee must have at least three directors, including at least one independent director for companies required to have independent directors. The Committee recommends the CSR Policy, the activities to be undertaken, and monitors implementation. A Company is not required to constitute a CSR Committee if CSR obligation/expenditure is ₹50 lakh or less. The annual compliance cycle for CSR compliance India involves:

• CSR Committee approval: Annual CSR plan approved by the CSR Committee before the financial year begins or at the start of the year
• Board approval: CSR Policy and annual plan approved by the full Board
• Implementation: CSR activities undertaken through the financial year, directly or through registered implementing agencies
• Annual Report disclosure: CSR reporting in the Board’s Annual Report is mandatory in the prescribed format covering amounts spent, activities undertaken, implementing agencies used, and reasons for any shortfall
• CSR-2 filing: Companies to which CSR provisions apply are also required to file Form CSR-2 with the Registrar of Companies in accordance with the timelines and manner prescribed by the Ministry of Corporate Affairs. . MCA extended the CSR-2 filing deadline for FY 2023-24 from December 31, 2024 to March 31, 2025 via G.S.R. 794(E) notification.

The preference under Section 135(5) is for CSR activities to be undertaken in the local areas where the company operates. This is not a mandatory requirement but is a statutory preference that the Board’s Annual Report should address if the company’s CSR is being undertaken in different geographies.

What Happens to Unspent CSR Amounts?

Unspent CSR funds at the end of the financial year must be transferred within specific timelines depending on the nature of the shortfall. Unspent amounts relating to ongoing projects must be transferred to a designated Unspent CSR Account within 30 days of the financial year-end and spent within three years. Unspent amounts not related to ongoing projects must be transferred to a Schedule VII fund such as PM CARES or the National CSR Fund within six months of the financial year-end. This distinction between ongoing project unspent amounts and general unspent amounts is the compliance point most foreign subsidiary boards miss. The two have different timelines, different destination accounts, and different documentation requirements. An ongoing project is a multi-year project approved by the Board, or a project whose duration is subsequently extended by the Board in accordance with the CSR Rules. . Amounts reserved for that project but not yet disbursed by March 31 can be retained in the Unspent CSR Account and spent within three years. If the project is not completed within three years, the residual unspent amount must be transferred to a Schedule VII fund. For amounts that were in the annual budget but were not tied to an approved ongoing project, the six-month transfer window is strict. A company that simply did not get around to implementing its CSR plan and holds unspent funds without a qualifying ongoing project designation cannot use the Unspent CSR Account mechanism. Those funds go to PM CARES or an equivalent Schedule VII fund within six months of March 31.

What Are the Penalties for Non-Compliance With CSR Compliance in India?

Penalties for failing to spend the required CSR amount and transfer unspent funds: the company is liable to a fine of twice the unspent amount or Rs. 1 crore, whichever is lower. Every officer in default is liable to a fine of one-tenth of the unspent amount or Rs. 2 lakh, whichever is lower. For other violations such as failure to constitute a CSR Committee or disclose the CSR policy, general penalty provisions apply. The 2021 amendment converted the CSR framework from a comply-or-explain regime into a comply-or-pay regime. Before 2021, a company that did not spend its CSR amount was required only to explain the reason in the Annual Report. The amendment removed that escape route and attached direct monetary penalties. The conversion matters practically for foreign subsidiary boards who may have been operating on the assumption that explanation of non-spending was adequate. It is no longer adequate. Section 135 CSR applicability foreign subsidiary penalties apply per year of default. A company that has been eligible for CSR compliance for three years and has made no spending has three separate years of potential penalty exposure, each calculated on that year’s unspent obligation. The cumulative exposure can be significant for companies that have grown quickly and are discovering their CSR obligations retrospectively. One clarification on the penalty structure: the penalty is on unspent and untransferred amounts, not on the total obligation. A company that spent 60% of its obligation and transferred the remaining 40% to PM CARES within six months is compliant. A company that spent 60% and retained the remaining 40% without transferring to the required fund within the prescribed timeline faces penalty on the untransferred 40%.

What Does the 2025 Pending Amendment Propose for CSR Compliance in India?

The Companies (Amendment) Bill, 2025, currently pending in Parliament, proposes three structural changes: lowering the financial thresholds significantly (net worth to Rs. 100 crore, turnover to Rs. 500 crore, net profit to Rs. 3 crore), mandating at least one CSR-experienced director on the CSR Committee, and introducing enhanced impact assessment requirements for larger spending companies. Until the Bill is passed, the existing thresholds and Committee constitution rules apply. The proposed threshold reduction is the most significant element for foreign subsidiaries. Under the existing Section 135, a foreign subsidiary with turnover below Rs. 1,000 crore and net profit below Rs. 5 crore is entirely outside the CSR compliance India regime. Under the proposed thresholds, a subsidiary with turnover above Rs. 500 crore would be in scope even if its net profit is below Rs. 3 crore and net worth is below Rs. 100 crore. The number of foreign subsidiaries brought into the regime if the Bill passes as drafted is considerably larger than the existing covered population. Compliance teams at foreign subsidiaries operating near the existing thresholds should model their CSR obligation under both the current and proposed threshold sets, so that if the Bill passes during the financial year, the subsidiary is not caught flat-footed on Committee constitution and policy formulation requirements.

Conclusion

CSR compliance India is an obligation that activates automatically when financial thresholds are met and does not require any action from the company for the obligation to arise. Foreign subsidiaries that have grown past the thresholds without having set up the CSR Committee, formulated the CSR Policy, or initiated spending may be exposed to penalties on unspent amounts and to the structural gaps in Committee constitution and policy documentation. The compliance structure is not complex to build correctly from the point of first applicability. The Section 198 net profit calculation, the Schedule VII activity selection, the CSR-1 registration for implementing agencies, and the CSR-2 annual filing together form a manageable annual compliance cycle. What makes it expensive is discovering the obligation late and attempting to retrofit the structure while simultaneously managing the penalties for prior years of non-compliance. Corporate Legit Consulting LLP advises foreign subsidiaries on CSR applicability foreign subsidiary assessments, Section 198 net profit calculations, CSR Committee constitution, CSR Policy drafting, Schedule VII activity selection, implementing agency CSR-1 registration, unspent fund transfer compliance, CSR-2 annual filing, and remediation of prior-year non-compliance. Reach out to Corporate Legit to assess whether your Indian subsidiary has crossed the CSR thresholds and whether current compliance structures are adequate.