TDS stands for Tax Deducted at Source It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income. For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to tRead more
TDS stands for Tax Deducted at Source
It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income.
For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to the provisions of the Income Tax Act, 1961.
TDS is deducted either,
- at the time of payment
OR
- At time of credit to the account of the payee or at the time of payment; whichever is earlier
We know that Income tax liability is calculated after the income for a year is earned. In the next year, which is called the Assessment Year, income tax payable is calculated on the income earned in the Previous Year
For example:
Year 2021-2022 – This year (Previous Year) – Income is earned here.
Year 2021-2022 – Next Year (Assessment Year) – Income tax is assessed here.
But, the government collects the income tax from the income of the assessee in the Previous Year itself by the following ways:
- TDS – Tax Deducted at Source
- TCS – Tax Collected at Source
- Advance Tax
Some of the most common sections are given below:
- Section 192 – Salary
- Section 194A – Interest other on securities deposits with the bank, post office etc) – @10%
- Section 194B and 194BB – Winning from lotteries, crossword puzzle – @30%
- Section 194 – DA – Payment in respect of Life Insurance Policy – @5%.
So, according to sections 192 to 194N, some amount of income tax is deducted from the income of the assessee in the Previous Year itself.
In the Assessment Year, the assessee also gets a tax credit for the TDS i.e. the Income Tax liability gets reduced by the amount of Tax Deducted at Source in the Previous Year.
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Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more
Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.
Now let’s understand the reason behind it.
We know preference shares are those shares that carry some preferential rights:
Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).
Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.
The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the
So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.
Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either
OR
OR
This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.
In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.
Bonus shares are fully paid shares that are issued to existing shareholders at no cost.
Let’s take a numerical example for further understanding:
ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.
The journal entries will be as follows:
Working note: Rs
9% preference shares due for redemption (1,000 x 10) – 1,00,000
Less: Amount of new shares issued (8,000 x 10) – 80,000
Amount to be transferred to CRR 20,000
Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.
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