• Repayment of principal amount of a debt before maturity is known as redemption of debentures. The sources of redemption of debentures are by raising fresh capital, sale of assets, utilisation of profits or by utilisation of surplus funds.
  • Debentures can be redeemed out of capital or out of profits.
  • In case of redemption out of capital, redemption is done without transferring the amount to DebentureRedemption Reserve.
  • When DRR is created for redemption, it is redemption out of profits. DRR of at least 25% of the value of debentures to be redeemed is to be created before redemption starts.
  • The company is also required to invest in specified securities, at least 15% of the amount of debentures maturing for payment by 30th April. This amount shall not be utilised for any other purpose other than redemption of debentures.
  • The three methods of redemption are lump sum method, draw of lots and purchase from open market method.
  • In lumpsum method redemption can be out of profits or out of capital. The amount due to debenture holders is paid at one time on maturity date. Debenture Redemption Investment may earn interest income that is subjected to tax deducted at source.
  • In draw of lots serial numbers of debentures to be redeemed first is decided by draw of lots. There is redemption of a certain portion of debentures as an annual instalment each year.
  • In this method company can invest in specified securities in the first year of redemption and that amount remains invested till the last lot is redeemed.
  • A company can redeem its debentures by purchasing from open market if authorised by its articles.
  • A company can do so for immediately cancellation of debentures or for investment purpose.
  • The benefits of this method are profit on redemption, benefits related to interest and benefits related to premium payable on redemption.
  • In case debentures are purchased for investment purpose than debenture purchased are shown at cost in ‘Assets’ part of Balance Sheet. When company has not cancelled own debentures immediately, interest becomes due on such debentures.
  • Debenture interest account is shown as expense in Statement of P&L and interest on own debentures is shown under the head ‘Other Income’.

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