Types of Debentures in Accounting: Meaning, Features, and Examples

Key Characteristics of Debentures

Benefits of Debentures for Companies

Debentures help companies raise funds without giving up ownership. Since the company is borrowing money instead of issuing equity shares , existing shareholders do not lose control or voting power. This makes debentures useful for businesses that need capital but want to avoid ownership dilution.

They can also make financial planning easier. In the case of fixed coupon debentures, the company knows the interest amount in advance, which helps in budgeting and cash flow planning . Interest paid on debentures used for business purposes may also be deductible, subject to the conditions under the applicable income tax law. The Income-tax Act, 2025 came into force from 1 April 2026, replacing the Income-tax Act, 1961 for the applicable future framework, so the exact tax treatment should be checked under the current law.

Debentures are also flexible as a fundraising option . A company can issue them as secured, unsecured, convertible, non-convertible, redeemable, or zero-coupon instruments depending on its funding requirement and investor profile. For example, secured debentures may appeal to conservative investors, while convertible or market-linked debentures may attract investors looking for higher potential returns.

Types of Debentures

Debentures can be classified on different bases. The main classification is:

All Types of Debentures Explained

1. Secured Debentures

Secured debentures are backed by a charge on the company’s assets. The charge may be fixed on a specific asset, such as land or machinery, or floating on a group of assets, such as inventory or receivables . If the company defaults, secured debenture holders have a claim over the charged assets. 

In practice, enforcement is usually carried out by the debenture trustee or through the applicable legal process, not casually by individual holders. For secured debentures, the charge created on company assets must be registered with the Registrar of Companies as required under Section 77 of the Companies Act, 2013.

2. Unsecured Debentures

Unsecured debentures are not backed by any specific asset of the company. The repayment depends mainly on the company’s creditworthiness and financial strength. Because the risk is higher, unsecured debentures generally carry a higher return than secured debentures. In case of liquidation, unsecured debenture holders do not have a specific claim over charged assets. They rank as unsecured creditors .

3. Registered Debentures

Registered debentures are issued in the name of the holder. The company records the debenture holder's name, address, and holding details in its register. Transfer of registered debentures requires proper documentation and registration. These are safer than bearer debentures because ownership records are maintained. Modern debenture issuances in India usually follow registered or dematerialised ownership records.

4. Bearer Debentures

Bearer debentures are debentures where ownership is transferred by physical delivery. The company does not maintain the holder’s name in the same way as registered debentures. In modern Indian practice, bearer debentures are mainly of historical and academic relevance. Current securities issuance and holding systems generally require proper ownership records, and listed securities are usually held in dematerialised form.

5. Convertible Debentures

Convertible debentures can be converted into equity shares of the issuing company. The conversion may happen on a fixed date or as per the terms of the issue. Under Section 71 of the Companies Act, 2013, a company may issue debentures with an option to convert them into shares, wholly or partly, at the time of redemption. However, this must be approved by a special resolution. Convertible debentures may carry a lower coupon because the investor also benefits from potential equity conversion. Convertible debentures are usually of two types:

6. Non-Convertible Debentures

Non-convertible debentures cannot be converted into equity shares. NCDs may be secured or unsecured, listed or unlisted, redeemable or perpetual, depending on the terms of issue. They are repaid in cash in accordance with the terms of issue. NCDs are common in Indian capital markets, especially among financial institutions and large companies. Listed NCDs are regulated under SEBI’s Issue and Listing of Non-Convertible Securities Regulations, 2021, which were amended up to January 21, 2026.

7. Redeemable Debentures

Redeemable debentures have a fixed repayment date. The company repays the principal amount either in one lump sum or in installments. This is the most common form of debenture because investors know when the principal will be repaid.

For example, a company issues ₹10,00,000 worth of 10% redeemable debentures for 5 years. The company pays annual interest and repays the principal at the end of the 5th year.

8. Perpetual or Irredeemable Debentures

Perpetual debentures do not have a fixed maturity date. The company may continue paying interest indefinitely and repay the principal only under specified conditions, such as winding up or a call option. These are rare in normal company accounting and are more relevant in specialised financial instruments. For general accounting students and small business readers, redeemable debentures are more important.

9. Zero-Coupon Debentures

Zero-coupon debentures do not pay regular interest. Instead, they are issued at a discount and redeemed at face value. In accounting, the discount or finance cost is recognised over the life of the debenture as per the applicable accounting standard.

For example, a company issues a debenture at ₹800 and redeems it at ₹1,000 after 5 years. The difference of ₹200 represents the return to the investor.

10. Market-Linked Debentures

Market-linked debentures are debt instruments where returns are linked to the performance of an index, security, or benchmark, such as the Nifty 50. Some MLDs may offer principal protection, while others may carry higher risk depending on the structure. 

Investors should read the offer document carefully because the return is not the same as a fixed coupon debenture. In India, listed market-linked debt securities are covered under SEBI’s non-convertible securities framework. The SEBI NCS Regulations, 2021 have been amended up to January 21, 2026.

Master Comparison Table

Secured vs Unsecured Debentures

Convertible vs Non-Convertible Debentures

How Debentures Are Recorded in Accounting

The accounting treatment depends on how the debentures are issued, whether they are issued at par, at discount, at premium, or with redemption premium. Below are basic accounting entries for common cases.

Journal Entry 1 - Issue of Debentures at Par

A company issues ₹10,00,000 worth of 10% debentures at par.

Narration: Being 10% debentures issued at par.

Journal Entry 2 - Issue of Debentures at Discount

A company issues ₹10,00,000 worth of debentures at a 10% discount. The company receives ₹9,00,000.

Narration: Being debentures issued at 10% discount.

For basic accounting, the discount is written off over the life of the debentures. For companies following Ind AS or other applicable accounting standards, discount, premium, and transaction costs may need to be treated through the effective interest rate method. The applicable accounting standard should be checked before finalising financial statements .

Journal Entry 3 - Issue of Debentures at Premium

A company issues ₹10,00,000 worth of debentures at a 5% premium. The company receives ₹10,50,000.

Narration: Being debentures issued at 5% premium.

Journal Entry 4 - Interest Accrued on Debentures

A company has ₹10,00,000 worth of 10% debentures. Annual interest is ₹1,00,000.

Narration: Being interest accrued on debentures.

Journal Entry 5 - Interest Paid on Debentures

Narration: Being debenture interest paid.

If TDS applies on debenture interest, the company should record the TDS payable separately instead of crediting the full amount to Bank A/c. Find an example of an entry where TDS is deducted below:

Narration: Being debenture interest paid after deduction of TDS.

Journal Entry 6 - Redemption of Debentures at Par

Narration: Being debentures redeemed at par.

Journal Entry 7 - Redemption of Debentures at Premium

Assume ₹10,00,000 debentures are redeemed at a 5% premium. Then the entry will be

Narration: Being amount due to debenture holders on redemption at premium.

Whereas at the time of payment the entry will be:

Narration: Being payment made to debenture holders.

Debenture Redemption Reserve, or DRR

Debenture Redemption Reserve is a reserve created out of company profits for the redemption of debentures. Section 71(4) of the Companies Act, 2013 provides for the creation of DRR out of profits available for dividend , and the amount credited to this account cannot be used except for redemption of debentures. However, DRR is not mandatory for every company. Its applicability depends on the type of company and the nature of the debenture issue.

DRR requirements apply based on the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. Certain categories, such as banking companies, All India Financial Institutions, many listed companies, NBFCs, and housing finance companies, may be exempt depending on the issue structure. Other unlisted companies may need to create DRR as prescribed under the rules.

Note: DRR is an accounting reserve created from profits. It does not automatically mean the company has set aside cash separately. Where applicable, companies may also need to deposit or invest a specified amount for debentures maturing in the relevant year. This is separate from merely creating a DRR in the books.

Journal Entry - Creating DRR

For example, a company creates DRR of ₹2,50,000. Then the journal entry in a double-entry system would be-

Narration: Being DRR created out of profits.

Journal Entry - Transfer of DRR After Redemption

Once debentures are redeemed, the DRR balance may be transferred to General Reserve.

Narration: Being DRR transferred to General Reserve after redemption of debentures.

Debenture Trust Deed and Debenture Trustee

A debenture trustee protects the interests of debenture holders. Under Section 71 of the Companies Act, 2013, a company cannot issue a prospectus or make an offer or invitation to the public or to more than 500 members for subscription of debentures unless one or more debenture trustees are appointed before the issue or offer.

For secured debentures, the company must appoint a debenture trustee before issuing the prospectus or letter of offer and execute the debenture trust deed within the prescribed time. Rule 18 of the Companies (Share Capital and Debentures) Rules refers to execution of the debenture trust deed to protect debenture holders. A debenture trust deed usually includes:

Debentures vs Bonds vs Shares

Important Note: In India, the terms “bond” and “debenture” are often used interchangeably in business and market practice. The Companies Act definition of debenture itself includes bonds. Therefore, it is not accurate to say that debentures are always unsecured and bonds are always secured. The real difference depends on the terms of the instrument, such as:

• Whether it is secured or unsecured
• Whether it is convertible or non-convertible
• Whether it is listed or unlisted
• Whether it is redeemable or perpetual
• Whether it carries fixed, floating, zero-coupon, or market-linked returns

Balance Sheet Presentation of Debentures

Debentures are shown as borrowings in the balance sheet . As per Schedule III of the Companies Act, 2013, long-term borrowings include bonds and debentures. Borrowings should also be classified as secured or unsecured, and the nature of security should be disclosed separately.

Balance Sheet Presentation Example

If any portion of long-term debentures is due within 12 months, that portion should be shown separately as the current maturity of long-term debt. Schedule III also separately identifies current maturities of long-term debt and unpaid matured debentures with interest accrued thereon.

Simple Presentation Format

Practical Example of Debenture Accounting

ABC Ltd. issues ₹10,00,000 worth of 10% secured redeemable debentures at par on April 1, 2026. The debentures are redeemable after 5 years.

At the Time of Issue

At the Time of Annual Interest Accrual

At the Time of Interest Payment

At the Time of Redemption

Tracking debenture balances, interest accruals, and redemption schedules manually increases the risk of misclassification in the balance sheet. A dedicated financial accounting software helps businesses maintain separate ledgers for debenture liabilities, record interest entries on time, and generate accurate final accounts without missing year-end obligations.

Common Mistakes to Avoid

Conclusion

Debentures are an important source of long-term finance for companies. They help businesses raise funds without diluting ownership, while giving investors a fixed, variable, or structured return. 

From an accounting point of view, debentures must be recorded as borrowings, interest must be accrued properly , and repayment obligations must be classified correctly in the balance sheet. From a compliance point of view, companies must carefully check the rules related to security creation, charge registration, debenture trustees, DRR, and SEBI regulations, where applicable.

For Indian businesses, debentures should not be treated as a simple loan entry only. The accounting, tax, company law, and disclosure requirements should all be reviewed before issuing or recording debentures. For businesses using BUSY accounting software , debenture liabilities, interest expense, TDS entries, and year-end balances can be tracked through proper ledgers, helping maintain accurate books and balance sheet reporting.