Accrued Interest

How it works

Bonds pay coupons on fixed dates — say every six months. But interest accrues every single day in between. If you buy a bond exactly halfway between coupon dates, the seller has earned roughly half a coupon's worth of interest that they will never receive, because the next full coupon will be paid to you, the new holder.

To keep things fair, the buyer pays the seller this accrued interest on top of the bond's quoted price. The total you actually pay is the *dirty price* = clean (quoted) price + accrued interest. The accrual is computed on a standard day-count basis.

In India

In the Indian bond market — G-Secs, state development loans, corporate bonds — settlement uses the dirty price, with accrued interest calculated to the settlement date. Retail investors who buy bonds on RBI Retail Direct or through brokers will see this adjustment reflected in the transaction amount.

For debt mutual funds, accrued interest is a key reason NAVs rise smoothly day after day. The fund accrues interest daily across its entire portfolio of bonds, which steadily lifts the net asset value even on days when bond prices don't move at all.

Why it matters

Understanding accrued interest prevents confusion about why you paid more than the quoted price for a bond. It also explains the quiet, almost mechanical daily grind-up you see in debt-fund NAVs — that steady rise is largely accrued interest at work, not market gains, which is why debt funds feel so much calmer than equity funds.

Common mistakes

Don't mistake the dirty price for an overcharge; you recover the accrued portion in your very next coupon payment. And for tax, in a debt fund the accrued interest is embedded in the NAV and taxed only when you redeem, unlike a directly held bond where the coupon income is taxed as and when it is received each period.