What is Capital Redemption Reserve?
Capital redemption reserve is a reserve that is created by the company out of its profits, during the redemption of preference shares. When a company proposes redemption or buy-back of its share, the capital base is reduced. To compensate for the reduction, a portion of the profit needs to be allocated separately. The allocated portion should be transferred to the Capital Redemption Reserve. The capital redemption reserve shall not be treated as a revenue reserve.
Geeky Takeaways:
- It is a sum set aside from the profits equal to the face value of the shares which are to be redeemed.
- The amount of capital redemption reserve can not be distributed to the company’s shareholders.
- Capital redemption reserve acts as a source of funding during buy-back.
- The amount can be utilized by the company to issue fully paid bonus shares to its members.
Table of Content
- Importance of Capital Redemption Reserve
- Companies Act and Capital Redemption Reserve
- When is Capital Redemption Reserve Used?
- Tax Benefit for Special Reserve
- Calculation and Accounting Entries of Capital Redemption Reserve
- Difference between Capital Redemption Reserve and Other Reserves
- Frequently Asked Questions (FAQs)