Interest payment in case of debentures issued by a company is which of the following?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Charged against the company's profit.
When a company issues debentures, it is under an obligation to pay interest thereon at a fixed percentage (half yearly) periodically until debentures are repaid. This percentage is usually as part of the name of debentures like 8% debentures, 10% debentures, etc., and interest payable is calculated at the nominal value of debentures. Interest on debenture is a charge against the profit of the company and must be paid whether the company has earned any profit or not. According to Income Tax Act, 1961, a company must deduct income tax at a prescribed rate from the interest payable on debentures if it exceeds the prescribed limit. It is called Tax Deducted at Source (TDS) and is to be deposited with the tax authorities. Of course, the debenture holders can adjust this amount against the tax due from them.