When debentures are to be redeemed out of profits by a company, an equivalent amount is transferred to which account?

Debenture Redemption Reserve A/c

The correct answer is option 2- Debenture Redemption Reserve A/c.

When debentures are to be redeemed out of profits by a company, an equivalent amount is transferred to Debenture Redemption Reserve account.

A company may source its redemption of debentures either out of capital or out of profits.
In case of redemption out of capital, there is no need to create DRR but when redemption is made out of profit then DRR is created.

All India financial institutions registered by Reserve Bank of India, banking companies, NFBCs registered with Reserve bank of India, Housing Finance companies registered to the National Housing bank and the companies listed on stock exchange and unlisted companies are exempted from creating Debenture Redemption Reserve and may redeem debentures out of capital. Whereas for "other unlisted companies", the adequacy of Debenture Redemption Reserve shall be ten percent of the value of the outstanding debentures.