Redemption of debentures explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Redeeming a debenture means repaying the borrowing. If the terms provide for a premium on redemption, the premium is repaid with it. For many unlisted companies the Act and the rules add two things before the money goes out: a reserve created out of profits, and an investment or deposit made well before maturity. This guide gives the methods of redemption, the entries for each stage and an invented company worked through a lump-sum redemption. It builds on our guide to issue of debentures, and the books are the kind kept by our books of accounts and compliance team.
Section 71(4) requires a debenture redemption reserve created out of profits available for payment of dividend, used only to redeem debentures. The percentages, the companies exempt and the investment of funds are in Rule 18(7) to (11), and this article takes each of them from our post on that rule. For an unlisted company that is not an NBFC or housing finance company, the post records ten per cent of the outstanding debentures as the reserve and fifteen per cent of those maturing in the next year to be invested or deposited on or before 30 April. On redemption the reserve is released to general reserve.
Where the rules come from
| Source | What it requires | What it means in the books |
|---|---|---|
| Companies Act, section 71(4) | Create a debenture redemption reserve account out of profits available for payment of dividend; use it only for redemption | Appropriate from reserves or the profit and loss balance; do not charge to profit |
| Section 71(8) | Pay interest and redeem as the terms of issue provide | Redeem on the date and at the price the terms fix |
| Section 71(1) | Debentures with an option to convert may be issued; a special resolution approves such an issue | Conversion is one more way of redeeming, by issuing shares |
| Rule 18(7) | See the rule post for the class of company, the ten per cent reserve and the fifteen per cent investment by 30 April | Quote percentages only from the rule as in force |
Our post Rule 18(7) to (11): the debenture redemption reserve and investment of funds states the classes (including those for which no reserve is needed) and the amounts; if your company is not in the case that post describes, read the rule itself. The section is in Section 71: debentures.
Methods of redemption
- Lump sum. All debentures are repaid at the end of the term. Credit the debenture holders and then bank.
- Instalments. A fixed part is repaid each period, so the debentures outstanding fall each year and, with them, interest and any reserve measured on what is outstanding.
- Purchase in the open market. The company buys its own debentures when it chooses. The gain or loss against face value needs its own treatment; this guide does not work it.
- Conversion. Debenture holders take shares instead of cash on the terms of issue, in line with section 71(1). The debenture account is closed against share capital (and securities premium for any premium).
Method for a lump-sum redemption
- Before the year of maturity ends. Transfer the required amount from general reserve or the profit and loss balance to the debenture redemption reserve.
- By 30 April. Where the rule requires, invest or deposit the specified part of the debentures maturing in the year ending 31 March of the next year, in the instruments the rule lists, and keep it there for the redemption.
- On redemption. Debit Debentures and any Premium payable on redemption, credit Debenture holders; realise the investment; pay the holders.
- After redemption. The reserve is no longer needed for its purpose, so transfer it back to general reserve.
Worked example: Tara Packaging Private Limited
The entity and all figures in this example are invented for illustration.
Tara Packaging is an unlisted company, not an NBFC or housing finance company. Its 3,000 debentures of 1,000 each (30,00,000), issued at par, fall due for lump-sum redemption at a premium of 5 per cent. The premium payable of 1,50,000 has been carried as a liability since issue. Following the rule post, the company creates a reserve of ten per cent of the outstanding debentures and invests fifteen per cent of the debentures maturing in the year. Interest on the investment is ignored.
Workings.
- Reserve: 30,00,000 x 10 per cent = 3,00,000, from general reserve.
- Investment: 30,00,000 x 15 per cent = 4,50,000, in a deposit with a scheduled bank.
- Redemption amount: 3,000 x 1,050 = 31,50,000 (30,00,000 face and 1,50,000 premium).
| Step | Particulars | Debit | Credit |
|---|---|---|---|
| 1 | General reserve Dr | 3,00,000 | |
| To Debenture redemption reserve | 3,00,000 | ||
| 2 | Debenture redemption investment Dr | 4,50,000 | |
| To Bank | 4,50,000 | ||
| 3 | 10 per cent Debentures Dr | 30,00,000 | |
| Premium payable on redemption Dr | 1,50,000 | ||
| To Debenture holders | 31,50,000 | ||
| 4 | Bank Dr | 4,50,000 | |
| To Debenture redemption investment | 4,50,000 | ||
| 5 | Debenture holders Dr | 31,50,000 | |
| To Bank | 31,50,000 | ||
| 6 | Debenture redemption reserve Dr | 3,00,000 | |
| To General reserve | 3,00,000 | ||
| Total | 78,00,000 | 78,00,000 |
| Capital and liabilities | Before redemption | After | Assets | Before redemption | After |
|---|---|---|---|---|---|
| Equity share capital | 20,00,000 | 20,00,000 | Fixed assets | 20,00,000 | 20,00,000 |
| General reserve | 5,00,000 | 8,00,000 | Inventories and receivables | 10,00,000 | 10,00,000 |
| Debenture redemption reserve | 3,00,000 | nil | Debenture redemption investment | 4,50,000 | nil |
| 10 per cent Debentures | 30,00,000 | nil | Bank | 35,00,000 | 8,00,000 |
| Premium payable | 1,50,000 | nil | |||
| Creditors | 10,00,000 | 10,00,000 | |||
| Total | 69,50,000 | 38,00,000 | Total | 69,50,000 | 38,00,000 |
Check. The "before redemption" balance sheet is drawn after steps 1 and 2. Bank after redemption: 35,00,000 + 4,50,000 - 31,50,000 = 8,00,000. General reserve: 5,00,000 + 3,00,000 = 8,00,000, the figure it held before step 1. Both sides total 69,50,000 before and 38,00,000 after, and the debits and credits of the entries both total 78,00,000. The fall in totals, 69,50,000 less 38,00,000 = 31,50,000, equals the cash paid to the holders.
How it shows in the financial statements
Under Schedule III, Division I, debentures sit under long-term borrowings, with the rate of interest and the particulars of redemption or conversion; the part falling due within the year is shown as current maturities of long-term borrowings, which Schedule III asks to be disclosed separately. The reserve appears under reserves and surplus.
Common mistakes
- Using the reserve for dividend or any purpose other than redemption.
- Creating the reserve by a charge to the profit and loss account; it is an appropriation of profits.
- Missing the 30 April investment and then holding it at less than the level the rule requires.
- Quoting a reserve percentage from memory or from a textbook, without checking the rule for your class of company.
- Forgetting to release the reserve after redemption.
Need help with debenture redemption?
If a debenture issue is nearing maturity, our team can check the reserve and the investment against the rule, prepare the entries and keep the records for the audit. See our books of accounts and compliance service and send us the terms of issue and the latest balance sheet.
Key takeaways
- The reserve comes out of profits available for payment of dividend and serves only redemption.
- Percentages and exempt classes come from Rule 18(7) to (11), not from section 71.
- Provide for the premium on redemption and record it with the debentures redeemed.
- Realise the investment before payment, and release the reserve after.
- The balance sheet should agree before and after, with general reserve restored.
Read next
- Issue of debentures: journal entries at par, premium and discount
- Redemption of preference shares: section 55, reserve and entries
- Rule 18(7) to (11): debenture redemption reserve and investment
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.