Corporate Accounting and Financial Management · Accounting for Share Capital

Redemption of Preference Shares: Section 55, CRR and Journal Entries

Updated 11 October 2026 · Fact-checked

Redemption of preference shares means repaying preference shareholders as per the terms of issue. Under Section 55, shares must be fully paid and redeemed only out of divisible profits or a fresh issue. If profits are used, transfer the nominal value not covered by a fresh issue to the Capital Redemption Reserve. Then pass the entries.

Understand Redemption of Preference Shares

A company limited by shares can issue only redeemable preference shares. Section 55(1) bars irredeemable ones. The articles must authorise the issue, and redemption must fall within 20 years of issue. A longer period is allowed for infrastructure projects, on the prescribed conditions.

Redemption is a repayment of capital, so the law protects creditors. Money must not simply leave the company. The second proviso to Section 55(2), clause (a), allows only two sources: profits that would otherwise be available for dividend, or the proceeds of a fresh issue of shares made for the purpose of redemption. Only fully paid shares can be redeemed (clause (b) of the same proviso).

If you use profits, the company must not shrink its capital base. So you transfer a sum equal to the nominal amount of the shares redeemed out of profits to the Capital Redemption Reserve (CRR). The provisions on reduction of share capital apply as if CRR were paid-up share capital (second proviso to Section 55(2), clause (c)). CRR may be applied to pay up unissued shares as fully paid bonus shares (Sections 55(4) and 63(1)(iii)). It cannot be used to pay dividends.

If you use a fresh issue, the new capital replaces the old. The fresh issue proceeds cover the nominal value, so you need CRR only for the part of the nominal value not covered by the proceeds. The standard rule: CRR = nominal value redeemed − face value of the fresh issue. Say the fresh issue is at a premium. Only the nominal (face) value of that issue counts, not the premium.

If shares are redeemed at a premium, the premium must be provided for before redemption. Under the second proviso to Section 55(2), clause (d)(ii), it may come from profits or from the securities premium account. For the class of companies in clause (d)(i), whose financial statements comply with the accounting standards prescribed under Section 133, the premium must be provided out of profits. Check the question for which applies. Also remember Section 64: the company must file a notice with the Registrar within thirty days of redemption.

Key rules to remember

Permitted sources: Redemption only out of (a) profits available for dividend, or (b) proceeds of a fresh issue of shares made for redemption; Second proviso to Section 55(2), clause (a). Shares must be fully paid (clause (b) of the same proviso).
CRR on redemption: CRR = Nominal value of shares redeemed − Face value of fresh issue of shares; Applies when redemption is out of profits. If the fresh issue covers the full nominal value, CRR is nil. Premium on the fresh issue is ignored.
Amount payable to holders: Amount payable = Nominal value × (1 + premium %) × number of shares redeemed; Premium on redemption is a liability of the company, usually provided before redemption.
Fresh issue to cover redemption: Number of new shares = Amount to be raised ÷ Issue price per share; Use issue price (including premium) to find the shares needed, but face value only for CRR.
Use of CRR: CRR is treated as paid-up share capital for the reduction provisions; it may be applied to pay up unissued shares as fully paid bonus shares; Second proviso to Section 55(2), clause (c); Sections 55(4) and 63(1)(iii). It cannot be used to pay dividends.
Filing: Notice to Registrar within 30 days of redemption, with altered memorandum; Section 64(1)(c).

How to solve Redemption of Preference Shares questions

Follow this order for any redemption question. It keeps the entries and CRR consistent.

1Read the balance sheet. Note the preference shares, any calls unpaid, reserves, securities premium and profit and loss balance.
2Check the shares are fully paid. If any call is due, make it first or note that those shares cannot be redeemed.
3Find the amount payable: nominal value plus premium on redemption, if any.
4Work out the fresh issue: its face value, premium and the cash raised. Pass entries for issue and allotment.
5Provide for premium on redemption from the profit and loss balance or securities premium as the question or company class requires.
6Compute CRR = nominal value redeemed − face value of the fresh issue. Transfer it from divisible profits (general reserve or profit and loss).
7Pass the redemption entry: debit preference share capital and premium payable, credit preference shareholders, then credit bank on payment.
8Check bank sufficiency and draw up the revised balance sheet extract if asked.

Quickest way: Four-line shortcut for the entries

When to use it: When time is short and the question is a standard one with figures given for reserves and the fresh issue.

Line 1: Amount to redeem = nominal + premium. Note the premium source.
Line 2: CRR = nominal redeemed − face value of fresh issue.
Line 3: Bank needed = amount to redeem − fresh issue cash. Check the balance is available.
Line 4: Write entries in this order: fresh issue, premium provision, CRR transfer, redemption, payment.

Common mistakes in Redemption of Preference Shares

Including the premium on the fresh issue when computing CRR.
Students use total cash raised instead of face value.
Fix: Use only the face value of the new shares. Premium on fresh issue goes to securities premium.
Transferring CRR equal to the full nominal value even when a fresh issue is made.
Students forget that fresh issue proceeds already replace capital.
Fix: Subtract the face value of the fresh issue from the nominal value redeemed.
Using securities premium for the premium on redemption when the question requires profits.
Students remember only the old rule or Section 52(2)(d).
Fix: Read the question. Clause (d)(i) of the second proviso to Section 55(2) requires profits for the prescribed class of companies. Otherwise either source may be used under clause (d)(ii).
Redeeming partly paid shares.
The call-due detail is buried in the balance sheet note.
Fix: Check paid-up status first. Section 55 allows only fully paid shares to be redeemed.
Using the CRR to pay the shareholders, to pay dividends or to write off losses.
Students treat it as any other reserve.
Fix: CRR is treated like paid-up capital. Its use is limited to the purposes the Act permits, such as paying up fully paid bonus shares. It is not available for dividends.
Debiting the premium on redemption after the shares are redeemed.
Students pay out first and adjust later.
Fix: The law requires the premium to be provided for before redemption. Pass the provision entry first.

Worked examples

Example 1

X Ltd has 5,000 8% redeemable preference shares of ₹100 each, fully paid. It redeems them at par out of profits. The general reserve is ₹6,00,000 and the bank balance is sufficient. Pass the journal entries.

Show the solution

Nominal value redeemed = 5,000 × ₹100 = ₹5,00,000.
No fresh issue, so CRR = ₹5,00,000 − nil = ₹5,00,000.
Transfer from general reserve: General Reserve A/c Dr ₹5,00,000 to Capital Redemption Reserve A/c ₹5,00,000.
Redemption due: 8% Preference Share Capital A/c Dr ₹5,00,000 to Preference Shareholders A/c ₹5,00,000.
Payment: Preference Shareholders A/c Dr ₹5,00,000 to Bank A/c ₹5,00,000.

Answer: CRR of ₹5,00,000 is created from general reserve. Entries: General Reserve Dr 5,00,000 to CRR 5,00,000; Preference Share Capital Dr 5,00,000 to Preference Shareholders 5,00,000; Preference Shareholders Dr 5,00,000 to Bank 5,00,000.

Example 2

Y Ltd has 3,000 10% redeemable preference shares of ₹100 each, fully paid. It redeems them at a 10% premium. For this it issues 2,000 equity shares of ₹100 each at par. The company has securities premium of ₹50,000 and a profit and loss balance of ₹4,00,000, and it is a company whose premium must be provided from profits. The existing bank balance is sufficient to pay the balance of ₹1,30,000 over and above the proceeds of the fresh issue. Pass the journal entries.

Show the solution

Nominal value redeemed = 3,000 × ₹100 = ₹3,00,000.
Premium on redemption = 10% × ₹3,00,000 = ₹30,000. Amount payable = ₹3,30,000.
Fresh issue: 2,000 × ₹100 = ₹2,00,000 at par. Face value = ₹2,00,000.
Issue entries: Bank Dr ₹2,00,000 to Equity Share Capital ₹2,00,000.
Premium must come from profits: Profit and Loss A/c Dr ₹30,000 to Premium Payable on Redemption A/c ₹30,000.
CRR = ₹3,00,000 − ₹2,00,000 = ₹1,00,000. Entry: Profit and Loss A/c Dr ₹1,00,000 to CRR A/c ₹1,00,000.
Redemption: 10% Preference Share Capital A/c Dr ₹3,00,000 and Premium Payable on Redemption A/c Dr ₹30,000 to Preference Shareholders A/c ₹3,30,000.
Payment: Preference Shareholders A/c Dr ₹3,30,000 to Bank A/c ₹3,30,000. Bank needed from existing balance = ₹3,30,000 − ₹2,00,000 = ₹1,30,000, which the question says is available.

Answer: Premium of ₹30,000 is charged to profit and loss. CRR is ₹1,00,000. Total paid to holders is ₹3,30,000, of which ₹2,00,000 comes from the fresh issue and ₹1,30,000 from the existing bank balance. Profit and loss balance falls by ₹1,30,000 (₹30,000 + ₹1,00,000) to ₹2,70,000.

Exam tips

Always state the source of redemption first. Examiners give marks for naming Section 55 and the two permitted sources.
Show the CRR working in a separate line. Even if the final entry is wrong, you earn method marks.
Check whether the question says the premium comes from profits or securities premium. Follow it exactly.
Write the entries in the legal order: fresh issue, premium provision, CRR, redemption, payment.
Mention filing of notice to the Registrar within thirty days under Section 64 if the question asks about compliance.

Practice questions from Accounting for Share Capital

Redemption of Preference Shares in other exams

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

Redemption of Preference Shares: frequently asked questions

Can a company issue irredeemable preference shares?

No. Section 55(1) bars a company limited by shares from issuing irredeemable preference shares. They must be redeemable within 20 years of issue, subject to the conditions in Section 55(2). A longer period is allowed for infrastructure projects.

How do you calculate Capital Redemption Reserve?

Take the nominal value of shares redeemed and subtract the face value of any fresh issue made for the redemption. The balance is transferred from divisible profits to CRR. The premium on the fresh issue is not deducted.

Can CRR be used to pay dividends?

No. CRR is treated as paid-up share capital for the reduction provisions, so it is not available for dividends. Section 55(4) allows it to be applied to pay up unissued shares as fully paid bonus shares.

Can partly paid preference shares be redeemed?

No. Section 55 says no shares can be redeemed unless they are fully paid. Make the call first, and then redeem.

Does redemption of preference shares reduce share capital?

For the purposes of the Act, redemption under Section 55 is not deemed a reduction of share capital. However, the CRR created is treated like paid-up capital, so the capital base is preserved.