{"id":756,"date":"2025-04-15T00:00:00","date_gmt":"2025-04-15T00:00:00","guid":{"rendered":"https:\/\/rize.blog.razorpay.in\/capital-redemption-reserve\/"},"modified":"2026-06-27T07:13:29","modified_gmt":"2026-06-27T07:13:29","slug":"capital-redemption-reserve","status":"publish","type":"post","link":"https:\/\/razorpay.com\/rize\/blogs\/capital-redemption-reserve\/","title":{"rendered":"Capital Redemption Reserve: Definition, Uses, Tax Benefits &#038; More"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\">What Is Capital Redemption Reserve?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The Capital Redemption Reserve (CRR) is a special reserve that a company must create when it redeems (buys back) its preference shares using its profits. As per corporate law, companies must transfer an amount equal to the nominal value of redeemed preference shares to the CRR to prevent capital reduction and maintain financial integrity.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">When Is Capital Redemption Reserve Used?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">CRR is utilised in various financial scenarios to maintain corporate stability, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Issuing bonus shares<\/strong>: CRR can be used to issue fully paid bonus shares to shareholders.<\/li>\n\n\n\n<li><strong>Funding share redemption<\/strong>: Ensures funds are available for preference share redemption.<\/li>\n\n\n\n<li><strong>Capital reconstruction<\/strong>: Helps restructure a company\u2019s capital without impacting free reserves.<\/li>\n\n\n\n<li><strong>Balancing capital losses<\/strong>: Used in cases where capital losses need adjustment.<\/li>\n\n\n\n<li><strong>Source for share buybacks<\/strong>: Required when companies buy back shares using free reserves.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Redemption Of Preference Capital<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The redemption of preference shares is subject to the following regulations:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Must be permitted in the <a href=\"https:\/\/razorpay.com\/rize\/blogs\/articles-of-association\/\"><strong>Articles of Association<\/strong><\/a>.<\/li>\n\n\n\n<li>Redeemable within <strong>20 years<\/strong> of issue.<\/li>\n\n\n\n<li>Methods of redemption:\n<ul class=\"wp-block-list\">\n<li><strong>Using Distributable Profits<\/strong>: Requires CRR creation.<\/li>\n\n\n\n<li><strong>Issuing Fresh Shares<\/strong>: CRR creation is not required if new capital is issued.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>Shareholder Approval (75%): Required for further preference share issues.<\/li>\n\n\n\n<li>Premium Payment: This can be funded from company profits or the securities premium account.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Modes of Redemption<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The three primary modes of redemption are:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Using Distributable Profits<\/strong>: CRR creation is mandatory, equal to the nominal value of redeemed shares.<\/li>\n\n\n\n<li><strong>Issuing Fresh Capital<\/strong>: If a company issues fresh capital equal to the redemption amount, CRR creation is not required.<\/li>\n\n\n\n<li><strong>Combination of Both<\/strong>: CRR is required only for the portion funded through distributable profits.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Modes of Redemption of Preference Shares<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Companies can redeem (buy back) preference shares using one of the following methods:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Using Distributable Profits<br><\/strong>The company uses its <strong>retained earnings or other profits<\/strong> to redeem the shares. In this case, it must create a <strong>Capital Redemption Reserve (CRR)<\/strong> equal to the <strong>nominal value<\/strong> of the redeemed shares to maintain financial stability.<\/li>\n\n\n\n<li><strong>Issuing Fresh Capital<br><\/strong>The company raises funds by issuing <strong>new shares<\/strong> to replace the redeemed preference shares. Since this method <strong>does not reduce capital<\/strong>, creating a CRR is <strong>not required<\/strong>.<\/li>\n\n\n\n<li><strong>Combination of Both<br><\/strong>A company may use <strong>both profits and fresh capital<\/strong> for redemption. CRR is required <strong>only for the portion funded through distributable profits<\/strong>, while the part covered by fresh capital does not require CRR.<\/li>\n<\/ol>\n\n\n\n\n\n\n<h2 class=\"wp-block-heading\">Calculation and Accounting Entries For Capital Redemption Reserve<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Calculation of CRR<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">CRR = <strong>Nominal Value of Redeemed Preference Shares (if using distributable profits)<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Journal Entries<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image w-richtext-figure-type-image w-richtext-align-fullwidth\"><img decoding=\"async\" src=\"https:\/\/cdn.prod.website-files.com\/652f7edfbfa272ea310aba7c\/6873a8941136bc431faacd8c_67fe4051e2fa0a1ebc555e63_image1.avif\" alt=\"\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Application of Capital Redemption Reserve<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>CRR <strong>can only be used<\/strong> for issuing <strong>fully paid bonus shares<\/strong>.<\/li>\n\n\n\n<li>CRR <strong>cannot be used<\/strong> for dividend distribution.<\/li>\n\n\n\n<li>CRR <strong>must exclude<\/strong> unrealised gains and self-generated intangible assets before determining free reserves.<\/li>\n\n\n\n<li>Classified as a <strong>statutory reserve<\/strong>, separate from revenue reserves.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Ready to start your business? Begin your <\/em><\/strong><a href=\"https:\/\/razorpay.com\/rize\/company-registration\/\"><strong><em>company registration<\/em><\/strong><\/a><strong><em> today with Razorpay Rize.<br><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Companies Act and Capital Redemption Reserve<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Section 55<\/strong>: Companies redeeming preference shares from profits must transfer an equivalent amount to CRR.<\/li>\n\n\n\n<li><strong>Section 69<\/strong>: Companies buying back shares using free reserves or securities premiums must transfer an amount equal to the face value of bought-back shares to CRR.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Difference Between Capital Redemption Reserve and Other Reserves<\/h2>\n\n\n\n<div data-rt-embed-type=\"true\">\n<table>\n<thead>\n<tr>\n<th>Feature<\/th>\n<th>Capital Redemption Reserve<\/th>\n<th>General Reserve<\/th>\n<th>Revenue Reserve<\/th>\n<th>Revenue Reserve<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<th>Purpose<\/th>\n<td>Preference share redemption<\/td>\n<td>Financial stability<\/td>\n<td>Operational expenses<\/td>\n<td>Long-term capital gains<\/td>\n<\/tr>\n<tr>\n<th>Mandatory creation<\/th>\n<td>Yes<\/td>\n<td>No<\/td>\n<td>No<\/td>\n<td>No<\/td>\n<\/tr>\n<tr>\n<th>Usable for dividend<\/th>\n<td>No<\/td>\n<td>Yes<\/td>\n<td>Yes<\/td>\n<td>No<\/td>\n<\/tr>\n<tr>\n<th>Usable for bonus shares<\/th>\n<td>Yes<\/td>\n<td>Yes<\/td>\n<td>No<\/td>\n<td>No<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Tax Benefits For Capital Redemption Reserve<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Under Section 36(1)(viii) of the Income Tax Act, 1961, specified entities can claim a tax deduction on contributions to a Special Reserve, reducing their taxable income. The deduction is capped at 20% of profits from eligible business activities before applying this clause. However, any future withdrawal from the reserve is treated as taxable income in the year of withdrawal.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Importance Of Capital Redemption Reserve<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Maintains Financial Stability<\/strong>: Prevents a reduction in share capital.<\/li>\n\n\n\n<li><strong>Protects Shareholders\u2019 Interests<\/strong>: Ensures capital is available for redemption.<\/li>\n\n\n\n<li><strong>Supports Capital Restructuring<\/strong>: Used in financial restructuring strategies.<\/li>\n\n\n\n<li><strong>Ensures Legal Compliance<\/strong>: Meets regulatory requirements under the Companies Act.<\/li>\n\n\n\n<li>Enhances Investor Confidence: Used for issuing bonus shares, benefiting shareholders.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Final Thoughts<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The Capital Redemption Reserve (CRR) plays a vital role in corporate finance by ensuring companies retain sufficient funds while redeeming preference shares. As a statutory reserve, it helps maintain financial stability, protects creditors&#8217; interests, and complies with legal requirements.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">While it cannot be used freely like other reserves, its role in issuing fully paid bonus shares makes it a strategic asset for companies looking to optimise their financial position.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Choose <\/em><\/strong><a href=\"https:\/\/razorpay.com\/rize\/company-registration\/\"><strong><em>online company registration<\/em><\/strong><\/a><strong><em> with Razorpay Rize for a paperless company launch.<br><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Frequently Asked Questions<\/h2>\n","protected":false},"excerpt":{"rendered":"<p>Understand what Capital Redemption Reserve (CRR) is, its purpose in a company\u2019s financial structure, how it\u2019s created, key uses, and potential tax benefits.<\/p>\n","protected":false},"author":1,"featured_media":757,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-756","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"_links":{"self":[{"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/posts\/756","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/comments?post=756"}],"version-history":[{"count":5,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/posts\/756\/revisions"}],"predecessor-version":[{"id":1635,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/posts\/756\/revisions\/1635"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/media\/757"}],"wp:attachment":[{"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/media?parent=756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/categories?post=756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/razorpay.com\/rize\/blogs\/wp-json\/wp\/v2\/tags?post=756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}