Interest on Debentures

A company that issues debentures is legally bound to pay interest on them at a fixed rate, usually half-yearly, until the debentures are redeemed. This interest rate is often part of the debenture's name — for example, 8% debentures or 10% debentures — and the interest is calculated on the nominal (face) value of the debentures, not on the issue price.

Interest on debentures is a charge against profit, not an appropriation. This means it must be paid regardless of whether the company has earned any profit or not. Under the Income Tax Act, 1961, the company must deduct income tax at the prescribed rate from the interest payable to debentureholders if the interest amount exceeds the prescribed limit. This deducted amount is called Tax Deducted at Source (TDS) and must be deposited with the tax authorities. The debentureholders can later adjust this TDS against their own tax liability.

Accounting Treatment

The journal entries for interest on debentures are recorded in four steps:

1. When interest becomes due — the company recognises the interest expense, the amount payable to debentureholders (net of TDS), and the liability for TDS.
2. When interest is paid to debentureholders.
3. At the end of the year — the Debenture Interest account is closed by transferring it to the Statement of Profit and Loss.
4. When TDS is paid to the government.

The journal entries are: