India’s 2% CSR Rule Explained (With Examples)

Table of Contents

1. Who Must Comply with the 2% Rule
2. Priority Areas for CSR Spending
3. Crafting a Strategic CSR Plan
4. Implementing CSR Projects
5. Monitoring and Measuring Impact
6. Reporting and Compliance
7. Conclusion – Turning CSR into Opportunity

Introduction

Corporate Social Responsibility (CSR) is not merely a buzzword in India — it’s mandatory.

India is one of the only a few nations globally where big business is compelled by law to invest in social and environmental causes.

Under Section 135 of the Companies Act, 2013 (which came into effect in April 2014), eligible companies must spend at least 2% of their average net profits from the last three years on CSR activities, and it’s not a small amount we’re talking about. By FY 2019–20, more than 21,300 companies together spent over ₹21,000 crore on CSR projects.

But what exactly is this “2% rule” in the real world? How does it influence business decisions in everyday life? And more importantly, how can business executives and NGO partners translate this requirement into true, sustainable results? Let’s dive in to understand India’s 2% CSR rule.

1. Who Must Comply with the 2% Rule

Any company that meets any one of the following criteria in the previous financial year must comply with Section 135:

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

If your company falls in this category, you must:

• Form a CSR Committee of the Board
• Adopt a CSR Policy
• Forecast your CSR spending (2% of the average net profit for the past 3 years)

Example:
A national manufacturing firm exceeding these thresholds would prepare its CSR policy by March 31 each year, set aside the 2% budget for approved projects, and assign a CSR Committee to oversee them.

2. Priority Areas for CSR Spending

The law specifies priority areas under Schedule VII of the Companies Act. These include:

• Healthcare
• Education
• Environmental sustainability
• Rural development
• Women empowerment
• Eradication of hunger and poverty
• National heritage, arts & culture
• Benefit of armed forces veterans
• Disaster management and relief
• Rural sports
• Contributions to public funded universities, IITs, and other research institutions

CSR funds must generally be used in these domains.

If a company is unable to spend the allocated amount, it must explain the reason in its Board Report. This promotes transparency and accountability.

3. Crafting a Strategic CSR Plan

Treat CSR as more than a checkbox — see it as a chance to create both social good and business value.

Key steps to build an impactful CSR plan:

• Align with core values:
  Choose causes that resonate with your company’s mission or expertise.
  Example: A tech company could fund digital literacy for youth. An energy firm could support clean power in rural areas.
• Set clear goals:
  Define success in measurable terms — such as number of beneficiaries, environmental improvements, or infrastructure built.
  Align these goals with the UN Sustainable Development Goals for broader relevance.
• Plan ahead:
  Identify a portfolio of projects or partners in advance. Many companies work with NGOs, government programs, or in-house foundations.
• Engage stakeholders:
  Involve employees, local communities, and experts in project design. This ensures programs address real needs and build local trust.

CSR spending in India has been growing steadily — reaching about ₹27,000 crore in FY 2022 — showing that many companies now see it as a driver of positive change.

4. Implementing CSR Projects

Once the strategy and budget are set, focus on smooth execution.

Implementation essentials:

• Formalize projects:
  Create clear project plans — including objectives, timelines, budgets, and implementation partners.
• Partner with credible NGOs:
  If you lack in-house capacity, work with registered NGOs under the CSR-1 process (mandatory since 2021).
• Track budgets separately:
  CSR spending is debited from profits, not counted as a business expense. Keep separate accounts and review regularly.
• Ensure legal compliance:
  All projects must fall within Schedule VII areas. Unspent CSR funds must be kept in a separate account and used within three years for the same purpose — or transferred to specified government funds if required.

Example:
A manufacturing company allocates ₹10 crore to rural healthcare. It partners with a public hospital to run mobile clinics, buys equipment, hires staff, and tracks patient visits. The result? Improved healthcare access and a clear audit trail.

5. Monitoring and Measuring Impact

Monitoring ensures your CSR efforts are not just well-intentioned, but effective.

• Regular reviews:
  The CSR Committee should get quarterly updates on activities, spending, and reach.
• Measure outcomes:
  Beyond financials, measure tangible impact — students educated, trees planted, patients treated, etc.
• Independent evaluations:
  Commission third-party impact assessments for large projects. This validates results and helps in learning for future programs.

6. Reporting and Compliance

CSR reporting isn’t just paperwork — it’s part of building public trust.

• Board Report:
  Include CSR committee details, 3-year average net profit, prescribed and actual spend, and reasons for any shortfall.
• Form CSR-2:
  Submit the annual electronic return to the Ministry of Corporate Affairs.
• Public disclosure:
  Upload your CSR policy on your company website. CSR data is also published on the National CSR Data Portal.
• Audits:
  CSR spending may be reviewed by internal or statutory auditors. Non-compliance can result in penalties.

7. Conclusion – Turning CSR into Opportunity

India’s 2% CSR rule may start as a legal requirement, but it’s a golden opportunity to strengthen your company’s reputation, community relationships, and social license to operate.

When CSR is aligned with business values, planned carefully, measured, and openly reported, it becomes a long-term investment in both people and purpose.

Each rupee spent is more than just compliance — it’s an investment in social capital.

Sources

• Press Information Bureau (Ministry of Corporate Affairs, GOI). “Rs 21,231 crore spent by 21,349 companies on CSR funds in 2019-20” gov.inpib.gov.in.
• Business Standard (Apr 2014). “India now only country with legislated CSR” business-standard.com.
• Hindustan Times (Apr 2014). “Socially responsible stocks can bolster the CSR law” comhindustantimes.com.
• Times of India (Mar 2024). “CSR health initiatives by corporates strengthened healthcare framework” indiatimes.com.
• Hindustan Times (Apr 2023). “Unlocking the power of CSR: Impactful initiatives and future outlook” com.