Q.What is the nature of Interest on Debentures?
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Debentures: The Company's Way of Borrowing Money
Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.
The Precise Meaning
A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).
A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.
Why Debentures Matter
Companies issue debentures because:
- They raise large funds without diluting ownership (unlike shares)
- Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
- Debentures are safer for investors than shares (fixed return, priority in repayment)
For investors, debentures offer:
- Fixed, predictable income
- Higher safety than equity shares
- Priority over shareholders if the company is liquidated
Accounting Treatment
When a company issues debentures, the journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | [Amount received] | |||
| To Debentures A/c | [Face value] | |||
| To Securities Premium Reserve A/c (if issued at premium) | [Premium amount] | |||
| (Being debentures issued at premium) |
Key points:
- Debit Bank A/c with the actual amount received
- Credit Debentures A/c with the face value (nominal value)
- If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
- If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)
Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").
Interest on Debentures
Interest is calculated as:
Interest = Face Value of Debentures × Rate of Interest × Time Period
For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:
₹10,00,000 × 9% = ₹90,000 per year
The journal entry for interest payment:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …
Debentureholders are creditors, not owners, so interest paid to them is a business expense, not a share of profit. …
Interest on Debentures is a charge against profit (an expense debited to the Statement of Profit and Loss before arriving at net profit), not an appropriation of profit.
Debentureholders are creditors of the company (they have lent money to it), not its owners. Therefore, interest payable to them is:
- A contractual, fixed obligation of the company — it must be paid every year at the specified rate, irrespective of whether the company earns a profit or suffers a loss.
- Debited to the Statement of Profit and Loss as a finance cost, before arriving at the figure of Net Profit — i.e., it reduces the profit available for appropriation, unlike partners'/shareholders' profit shares, dividends, or transfers to reserve, which are appropriations made only out of profits actually earned. …
Showing the 12 most recent of 88 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.(a) Reserve capital is that portion of the ________ capital that can be called only in the event of winding up of the company. (A) called-up (B) uncalled (C) paid-up (D) subscribed(OR)(b) The debentures which do not carry a specific rate of interest are known as : (A) Irredeemable debentures (B) Bearer debentures (C) Specific coupon rate debentures (D) Zero coupon rate debentures
›Reveal solutionSolution
Part (a): Reserve capital is a part of uncalled capital — option (B).
Part (b): Debentures with no specific interest rate are Zero coupon rate debentures — option (D).
Part (a)
Under Section 65 of the Companies Act, 2013, a company may by special resolution decide that a portion of its uncalled share capital shall not be called except on winding up. This ring-fenced portion is Reserve Capital — extra security for creditors. …
- CBSE 2026Set MARCH1 markQ.Who is called debenture holder?
›Reveal solutionSolution
A debenture holder is a creditor (lender) of the company who owns its debentures.
A debenture is a written acknowledgement of a debt taken by a company, usually carrying a fixed rate of interest. The person who buys/holds such debentures is called a debenture holder.
Key points:
- He is a creditor of the company, not a shareholder/owner.
- He receives a fixed rate of interest whether or not the company earns profit.
- He has the right to get his principal back on redemption. …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The rate of return on debentures is called __________. (Dividend/Interest)
›Reveal solutionSolution
The rate of return on debentures is called interest.
Debentures represent borrowed capital (debt) of the company, not ownership. Therefore debenture-holders are creditors who receive a fixed, pre-agreed rate of return called interest, which is a charge against profit and payable irrespective of profits. 'Dividend' …
- CBSE 2026Set ANNUAL1 markQ.Write the difference between share and debenture on the basis of voting right.
›Reveal solutionSolution
On the basis of voting right: shareholders have it, debenture-holders do not.
Basis Share Debenture Nature Ownership capital Borrowed capital (loan) Voting right An equity shareholder has the right to vote in the company's general meetings A debenture-holder, being only a creditor, has no voting right in company affairs … - CBSE 2026Set ANNUAL1 markMCQQ.Debenture holders are the(a) Customers of the company(b) Owners of the company(c) Creditors of the company(d) All of them
›Reveal solutionSolution
Debenture-holders are creditors of the company - option (c).
A debenture is part of a company's borrowed capital. The debenture-holders have lent money to the company and are therefore its creditors; they are entitled to interest at a fixed rate (whether or not the company earns a profit) …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Debentures represents a ________ term loan taken by the company.
›Reveal solutionSolution
Answer: Long (long-term loan).
A debenture is a written acknowledgement of a loan raised by a company, usually repayable after a long period. It forms part of the company's borrowed (long-term) capital. Henc …
- CBSE 2026Set ANNUAL1 markQ.State whether True or False: Debentureholders are owners of the company.
›Reveal solutionSolution
The statement is False.
A debenture is an acknowledgement of a loan given to the company, so debentureholders are creditors who get fixed interest. The owners of the com …
- CBSE 2026Set ANNUAL1 markMCQQ.Under which major head are debentures shown on the liabilities side of the balance sheet of a company?(a) Current Liabilities(b) Non-current Liabilities(c) Share Capital(d) Reserves and Surplus(a) Current Liabilities(b) Non-current Liabilities(c) Share Capital(d) Reserves and Surplus
›Reveal solutionSolution
Debentures are shown under the Non-current Liabilities major head.
Under Schedule III, Part I of the Companies Act, 2013, the Equity and Liabilities side of a company's balance sheet is grouped under three major heads:
- Shareholders' Funds
- Non-current Liabilities — includes Long-term Borrowings (debentures, term loans, etc.), Deferred Tax Liabilities, Long-term Provisions
- Current Liabilities — includes Short-term borrowings, Trade payables, Other current liabilities, Short-term provisions …
- CBSE 2026Set ANNUAL1 markMCQQ.What does company pay to debentureholders as return on debentures?(a) Interest(b) Dividend(c) Salary(d) Goodwill(a) Interest(b) Dividend(c) Salary(d) Goodwill
›Reveal solutionSolution
A company pays Interest to debenture holders as the return on their debentures.
Debentures represent borrowed/loan capital of a company; a debenture holder is a creditor of the company, not a member/owner. In return for lending money to the company, a debenture holder is entitled to receive a FIXED rate of return mentioned on the debenture certificate (e.g. 9% Debentures, 12% Debentures), called Interest.
Key distinguishing features of interest on debentures:
- It is a CHARGE against profit — the company is legally bound to pay it whether it earns a profit or incurs a loss.
- It is paid at a fixed, predetermined rate.
- It is a business expense, debited to the Statement of Profit and Loss, and reduces the company's taxable profit. …
- CBSE 2026Set ANNUAL1 markQ.Which type of debentures can not be converted into shares?
›Reveal solutionSolution
Non-Convertible Debentures cannot be converted into shares.
On the basis of convertibility, debentures are classified into two types:
- Convertible Debentures — these carry an option/right for the holder to convert them (fully or partly) into equity shares (or sometimes preference shares) of the company, after a specified period and on specified terms. …
- CBSE 2026Set ANNUAL1 markMCQQ.Interest on Debentures is a charge against(a) Share Capital(b) General Reserve(c) Dividend(d) Profit
›Reveal solutionSolution
Interest on Debentures is a mandatory contractual expense (a "charge"), deducted while computing profit itself — it is payable even if the company makes a loss, unlike dividend.
Debentures represent borrowed funds — debenture holders are creditors of the company, not its owners/members. The company is therefore legally and contractually bound to pay interest on debentures at the stated rate, regardless of whether the company earns a profit or incurs a loss in a given year. This makes it a charge against profit — an expense debited to the Statement of Profit & Loss before arriving at the figure of net profit — exactly like rent, salaries, or depreciation.
This is fundamentally different from:
- Dividend, which is a mere appropriation of profit — it can be paid only if the company has earned a profit, and the Board/shareholders can choose not to declare it even when profits exist. …
- CBSE 2026Set ANNUAL1 markMCQQ.Debentures which do not carry any specific rate of interest are known as(a) registered debentures(b) zero-coupon rate debentures(c) bearer debentures(d) secured debentures
›Reveal solutionSolution
A "zero-coupon" debenture carries no stated interest rate at all — the investor's entire return comes from the gap between its (discounted) issue price and its redemption value.
Debentures can be classified on several bases, and "rate of interest" is one of them:
- Specific Coupon Rate Debentures — carry a fixed, stated rate of interest (e.g., "9% Debentures"), paid periodically to the debenture holder.
- Zero-Coupon Rate Debentures — carry no stated/specific rate of interest at all. They are typically issued at a substantial discount to their face value and are redeemed at face value (or a value close to it); the difference between the issue price and the redemption value itself constitutes the investor's effective return, functioning like implicit interest.
This is a different classification axis from:
- Registered vs. Bearer Debentures (based on whether the company maintains a record of the holder's name), …
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