Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Capital Redemption Reserve and Premium on Redemption

Updated 10 October 2026 · Fact-checked

When preference shares are redeemed out of profits, the company transfers an amount equal to their nominal value to the Capital Redemption Reserve (CRR), less any fresh issue proceeds. Premium payable on redemption is provided for from profits or, where permitted, securities premium before redemption. CRR can later be used only for fully paid bonus shares.

Understand Capital Redemption Reserve and Premium on Redemption

Preference shares are redeemed so that the company repays shareholders. Creditors rely on share capital as a cushion. So the law does not let a company simply pay out capital. Redemption must be funded in a way that keeps that cushion in place.

Section 55 allows redemption only out of profits that would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose. Shares must also be fully paid before redemption.

When redemption is out of profits, the company must transfer a sum equal to the nominal amount of the shares redeemed to the Capital Redemption Reserve Account. The Act treats this reserve like paid-up share capital for the rules on reduction of share capital. In effect, profits that left the distributable pool are locked in as capital. If redemption is funded fully by a fresh issue, no CRR is needed. If the fresh issue is smaller than the nominal value redeemed, CRR is created for the shortfall.

Premium on redemption is a different matter. It is the extra amount paid above nominal value. It must be provided for before the shares are redeemed. The premium can come out of profits or out of the securities premium account. For a class of companies prescribed under the Act whose financial statements follow the accounting standards under section 133, the Act requires the premium to be provided for out of profits. Your question will usually tell you which applies; if it does not, state your assumption clearly.

CRR has one permitted use: paying up unissued shares to be issued to members as fully paid bonus shares. Section 55(4) and section 63 both allow this. CRR is also created under section 69 when a company buys back its own shares out of free reserves or securities premium.

Key rules to remember

CRR on redemption out of profits: CRR = Nominal value of shares redeemed − Nominal value of fresh shares issued for redemption; Only the profit-funded part needs CRR. If fresh issue is equal to or more than the nominal value redeemed, CRR is nil. The fresh issue is counted at face value, not including any premium received.
Premium payable on redemption: Premium = Redemption price − Nominal value, per share × number of shares; Provide for it before redemption, from profits or securities premium as the question or law permits.
Source rule (section 55): Redemption only out of profits available for dividend OR proceeds of fresh issue; shares must be fully paid; Partly paid preference shares must be called up first. Make them fully paid before redeeming.
Use of CRR: CRR can be applied only to pay up unissued shares as fully paid bonus shares; Sections 55(4), 63(1)(iii) and 69(2).
Application of securities premium: Securities premium may be used for premium payable on redemption of redeemable preference shares or debentures; Section 52(2)(d). Also for bonus shares, preliminary expenses, issue expenses and buy-back.

How to solve Capital Redemption Reserve and Premium on Redemption questions

Use this order for any question on redeeming preference shares with CRR and premium.

1Read the facts: shares to redeem, whether fully paid, redemption price, and any fresh issue planned.
2Calculate the nominal value to be redeemed and the premium payable (redemption price − nominal value).
3Check the source of funds: fresh issue proceeds, profits and reserves available for dividend, and the securities premium rule for premium.
4Compute CRR: nominal value redeemed less nominal value of the fresh issue.
5Pass entries in order: fresh issue, premium provision (from profits or securities premium), transfer to CRR, then payment on redemption.
6Check that the reserve used for CRR is a profit-type reserve such as general reserve or the profit and loss balance, and that enough balance remains.
7Show the working note for CRR and premium, and (if asked) the balance sheet extract or bonus issue entry.

Quickest way: Three-line CRR and premium check

When to use it: Use this for MCQs and for the working note in a long numerical question.

Line 1: Nominal value redeemed = shares × face value.
Line 2: CRR = Line 1 − face value of fresh issue. Premium = shares × (redemption price − face value).
Line 3: Premium goes to securities premium or profits; CRR always comes from profits. Then write the entries in the order: fresh issue, premium, CRR, payment.

Common mistakes in Capital Redemption Reserve and Premium on Redemption

Transferring the redemption amount including premium to CRR.
Students use the total payout instead of the nominal value.
Fix: CRR is based on nominal value only. Premium is handled separately.
Deducting fresh issue proceeds including securities premium when finding CRR.
The whole cash received feels like funding.
Fix: Deduct only the face value of the fresh shares. The premium received on a fresh issue goes to securities premium.
Using securities premium to create CRR.
Both are capital-type reserves, so students mix them up.
Fix: Under section 55(2), CRR is created out of profits. Securities premium can be used for the premium on redemption, not for CRR.
Redeeming partly paid shares.
Students skip the check on whether shares are fully paid.
Fix: Section 55 requires shares to be fully paid. Show the call money entry first, or state the assumption.
Providing for premium after paying the shareholders.
Students follow the cash sequence.
Fix: The Act requires the premium to be provided for before redemption. Pass the provision entry first.
Using CRR to write off losses or pay dividend.
It looks like any other reserve.
Fix: CRR may only be applied to issue fully paid bonus shares.

Worked examples

Example 1

Sunrise Textiles Ltd has 5,000 9% preference shares of ₹100 each, fully paid, redeemable at a premium of 10%. To redeem, it issues 2,000 equity shares of ₹100 each at par. General reserve is ₹4,00,000 and securities premium is ₹50,000. Premium is to be met from securities premium first, then profits. Show the journal entries, assuming equity shares are fully subscribed and paid, and bank balance is sufficient.

Show the solution

Nominal value redeemed = 5,000 × ₹100 = ₹5,00,000.
Premium payable = 10% × ₹5,00,000 = ₹50,000. This equals securities premium available, so it is fully covered from that account.
Fresh issue = 2,000 × ₹100 = ₹2,00,000 (at par, so no new premium).
CRR = ₹5,00,000 − ₹2,00,000 = ₹3,00,000, from general reserve (balance ₹4,00,000 is enough).
Entry 1: Bank A/c Dr ₹2,00,000 to Equity Share Capital A/c ₹2,00,000.
Entry 2: Securities Premium A/c Dr ₹50,000 to Premium on Redemption of Preference Shares A/c ₹50,000.
Entry 3: General Reserve A/c Dr ₹3,00,000 to Capital Redemption Reserve A/c ₹3,00,000.
Entry 4: Preference Share Capital A/c Dr ₹5,00,000 and Premium on Redemption of Preference Shares A/c Dr ₹50,000 to Preference Shareholders A/c ₹5,50,000.
Entry 5: Preference Shareholders A/c Dr ₹5,50,000 to Bank A/c ₹5,50,000.

Answer: CRR created = ₹3,00,000. Premium of ₹50,000 is met from securities premium. Total cash paid to preference shareholders = ₹5,50,000.

Example 2

Kaveri Industries Ltd redeems 3,000 preference shares of ₹100 each, fully paid, at a premium of 5%, and makes no fresh issue. Available: profit and loss balance ₹2,50,000, general reserve ₹2,00,000, no securities premium. Premium is to be paid out of profits. After redemption, the company issues bonus shares of ₹100 each using the whole CRR. Find CRR, the entries, and the number of bonus shares.

Show the solution

Nominal value redeemed = 3,000 × ₹100 = ₹3,00,000.
Premium = 5% × ₹3,00,000 = ₹15,000, provided from profit and loss account before redemption.
No fresh issue, so CRR = ₹3,00,000. This is taken from general reserve ₹2,00,000 and ₹1,00,000 from profit and loss account.
Check profit and loss use: ₹15,000 + ₹1,00,000 = ₹1,15,000, which is within ₹2,50,000. Balance left is ₹1,35,000.
Entry 1: Statement of Profit and Loss A/c Dr ₹15,000 to Premium on Redemption of Preference Shares A/c ₹15,000.
Entry 2: General Reserve A/c Dr ₹2,00,000 and Statement of Profit and Loss A/c Dr ₹1,00,000 to Capital Redemption Reserve A/c ₹3,00,000.
Entry 3: Preference Share Capital A/c Dr ₹3,00,000 and Premium on Redemption A/c Dr ₹15,000 to Preference Shareholders A/c ₹3,15,000, then pay by bank.
Bonus issue: CRR A/c Dr ₹3,00,000 to Bonus to Shareholders A/c, then to Equity Share Capital A/c ₹3,00,000.
Number of bonus shares = ₹3,00,000 ÷ ₹100 = 3,000 shares.

Answer: CRR = ₹3,00,000. Premium of ₹15,000 is charged to profits. Bonus shares issued = 3,000 fully paid shares of ₹100 each. Cash paid on redemption = ₹3,15,000.

Exam tips

In the MCQ, check whether the fresh issue is at par or premium. Only its face value reduces CRR.
Always write the working note for CRR and premium. Step marks are given even if one figure goes wrong.
State your source for premium (securities premium or profits) clearly. If the question is silent, state your assumption.
Pass the premium provision before the redemption entry, and keep the CRR transfer before the payment.
If the question mentions bonus shares, remember CRR can only be used for fully paid bonus shares, and a company must meet the conditions in section 63 before it capitalises reserves.

Practice questions from Redemption of Preference Shares, Issue and Redemption of Debentures

Capital Redemption Reserve and Premium on Redemption in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Redemption Reserve and Premium on Redemption: frequently asked questions

How do I calculate CRR on redemption of preference shares?

Take the nominal value of shares redeemed and subtract the face value of any fresh shares issued for the redemption. The balance is transferred from profits to CRR. If the fresh issue covers the full nominal value, no CRR is needed.

Can securities premium be used to create CRR?

No. Under section 55, CRR is created out of profits that would otherwise be available for dividend. Securities premium can be used for the premium payable on redemption, as section 52(2)(d) permits.

When should premium on redemption be provided for?

It must be provided for before the shares are redeemed. The source can be profits or securities premium, subject to the rule for companies whose financial statements follow section 133 standards, where profits are required.

What can CRR be used for?

CRR may be applied to pay up unissued shares to be issued to members as fully paid bonus shares. It cannot be used to pay dividend or write off losses.

Does buy-back also create CRR?

Yes. Under section 69, when a company buys back shares out of free reserves or securities premium, a sum equal to the nominal value of the shares bought is transferred to CRR.