Corporate Accounting and Financial Management · Accounting for Debentures

Interest on Debentures and TDS Journal Entries

Updated 11 October 2026 · Fact-checked

Interest on debentures is a finance cost charged to the Statement of Profit and Loss, whether or not the company earns a profit. Calculate it as face value × coupon rate × time. Debit Debenture Interest Account for the gross amount, credit TDS Payable for tax deducted, and credit Debenture holders or Bank for the net amount.

Understand Interest on Debentures and TDS

A debenture is a loan to the company. The company must pay interest on it at the agreed rate, called the coupon rate. The rate is always applied to the face value of the debentures, not to the issue price. Discount or premium on issue does not change the interest.

Interest is an expense. It is a charge against profit, not an appropriation of profit. So the company must pay it even in a year of loss. This is the key difference from dividend. Section 71(8) of the Companies Act, 2013 says a company must pay interest and redeem debentures as per the terms of issue. Section 198(4)(f) and (g) also treat interest on debentures and on secured loans as a deduction when computing net profit for section 197.

Interest accrues day by day, but it is usually paid half-yearly or yearly. At the year-end, interest that has accrued but is not yet paid is shown as an outstanding liability. You record it so that the expense matches the year it belongs to.

When the company pays interest, it usually has to deduct tax at source (TDS) and deposit it with the Government. The debenture holder receives the net amount. The company debits the full gross interest to the Debenture Interest Account. It credits TDS Payable for the tax and the debenture holders or bank for the rest. Later, when the company deposits the tax, it debits TDS Payable and credits Bank. The rate and the exemptions depend on the tax law in your syllabus, so use the rate given in the question.

At the year-end, the balance of the Debenture Interest Account is transferred to the Statement of Profit and Loss as a finance cost.

Key rules to remember

Annual interest: Interest = Face value of debentures × Coupon rate; Always use face value, never issue price or market price.
Interest for part of a year: Interest = Face value × Rate × Months outstanding ÷ 12; Use this when debentures are issued or redeemed during the year.
TDS amount: TDS = Gross interest × TDS rate; Apply the rate stated in the question to gross interest.
Net interest paid: Net payment = Gross interest − TDS; Debenture holders receive this amount.
Payment entry: Debenture Interest A/c Dr (gross); to TDS Payable A/c (tax); to Bank A/c (net); The expense is always the gross amount.
Deposit of TDS: TDS Payable A/c Dr; to Bank A/c; Passed when the tax is paid to the Government.

How to solve Interest on Debentures and TDS questions

Use this method for any question on interest and TDS on debentures.

1Find the face value of debentures outstanding. Ignore discount or premium.
2Note the coupon rate and the dates of issue, payment and redemption.
3Calculate interest for each period: face value × rate × months ÷ 12.
4Calculate TDS on gross interest using the given rate. Find net payment.
5Pass the entry for payment: debit Debenture Interest (gross), credit TDS Payable and Bank (or Debenture holders).
6Pass the entry for depositing TDS if the question mentions it.
7At the year-end, pass an entry for outstanding interest, if any, for the unpaid period.
8Transfer the Debenture Interest Account to the Statement of Profit and Loss and show the outstanding amount as a current liability.

Quickest way: Gross first, then split

When to use it: Use it when time is short and the question gives a rate, a payment date and a TDS rate.

Write gross interest in one line: face value × rate × time.
Compute TDS and net below it.
Write one three-line entry: Dr gross, Cr TDS, Cr Bank.
Add the transfer to Profit and Loss as a final line.
Check that Dr total equals Cr total.

Common mistakes in Interest on Debentures and TDS

Calculating interest on issue price instead of face value.
Students see the amount received in the question and use it.
Fix: Interest is always on the nominal value. Premium or discount has no effect on it.
Debiting only the net amount to Debenture Interest Account.
Students record only the cash that leaves the bank.
Fix: Debit the gross interest. The TDS part is a liability, not a saving in expense.
Treating interest as an appropriation of profit.
It is confused with dividend.
Fix: Interest is a charge against profit and is payable even if there is a loss.
Ignoring outstanding interest at the year-end.
Students record only interest actually paid.
Fix: Accrue interest for the unpaid months and show it as a liability.
Using a full year's interest for debentures issued or redeemed mid-year.
The time period is skipped in a hurry.
Fix: Count the months from the date of issue or up to the date of redemption.
Forgetting the entry for depositing TDS.
Students think the job ends when interest is paid.
Fix: Debit TDS Payable and credit Bank when the tax is deposited, if the question gives the deposit.

Worked examples

Example 1

Arjun Industries Ltd issued 10,000 12% debentures of ₹100 each at par on 1 April. Interest is payable half-yearly on 30 September and 31 March. TDS is deducted at 10%. Pass the entries for the first half-year interest and the deposit of TDS.

Show the solution

Face value = 10,000 × ₹100 = ₹10,00,000.
Half-year interest = ₹10,00,000 × 12% × 6 ÷ 12 = ₹60,000.
TDS = ₹60,000 × 10% = ₹6,000.
Net payment = ₹60,000 − ₹6,000 = ₹54,000.
Entry on 30 September: Debenture Interest A/c Dr ₹60,000; to TDS Payable A/c ₹6,000; to Bank A/c ₹54,000.
Entry on deposit of TDS: TDS Payable A/c Dr ₹6,000; to Bank A/c ₹6,000.

Answer: Interest ₹60,000 is debited, TDS ₹6,000 is credited to TDS Payable and ₹54,000 is paid by bank. TDS of ₹6,000 is later deposited.

Example 2

Meera Textiles Ltd has 5,000 9% debentures of ₹200 each, issued at a discount of 5%, outstanding all year. Interest is paid yearly on 31 March. The year ends on 31 March. TDS is 10%. Calculate the interest, pass the entry for payment and show the transfer to Profit and Loss.

Show the solution

Face value = 5,000 × ₹200 = ₹10,00,000. The discount is ignored for interest.
Interest = ₹10,00,000 × 9% = ₹90,000.
TDS = ₹90,000 × 10% = ₹9,000.
Net payment = ₹90,000 − ₹9,000 = ₹81,000.
Payment entry: Debenture Interest A/c Dr ₹90,000; to TDS Payable A/c ₹9,000; to Bank A/c ₹81,000.
Transfer entry: Statement of Profit and Loss Dr ₹90,000; to Debenture Interest A/c ₹90,000.

Answer: Interest is ₹90,000 on face value. TDS is ₹9,000 and bank pays ₹81,000. The full ₹90,000 is charged to Profit and Loss.

Exam tips

Read whether the question gives the rate of TDS. Use only that rate.
Show the gross, TDS and net calculation as working notes. Marks often go to them.
If the date of issue is mid-year, count months carefully and write the count in your working.
Mention that interest is payable under section 71(8) even if there is no profit, when a theory part is asked.
Always end with the transfer to Profit and Loss and the outstanding interest in the Balance Sheet.

Practice questions from Accounting for Debentures

Interest on Debentures and TDS in other exams

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

Interest on Debentures and TDS: frequently asked questions

Is interest on debentures paid out of profit?

No. It is a charge against profit, so the company pays it even if it has made a loss. Section 71(8) requires the company to pay interest as per the terms of issue.

Is interest calculated on issue price or face value?

It is calculated on face value at the coupon rate. Discount or premium at issue does not change the interest.

What is the journal entry for debenture interest with TDS?

Debit Debenture Interest Account with the gross interest. Credit TDS Payable with the tax deducted and credit Bank with the net amount paid.

Where is debenture interest shown in final accounts?

The Debenture Interest Account is transferred to the Statement of Profit and Loss as a finance cost. Interest due but unpaid is shown as a current liability.