Accrued Interest

When you invest in a bond that pays interest twice a year, interest adds up daily between those payment dates. Even though the interest hasn’t been paid yet, it keeps growing day by day. This growing amount is called accrued interest. It helps you track how much interest you’ve earned so far, even if the payment hasn’t been made yet. 

What is accrued interest? 

Accrued interest is the interest that builds up over time on financial instruments like loans, bonds, or savings accounts, but hasn't yet been paid or received. It is recognised for accounting purposes before the actual payment date.  

Working and calculation of accrued interest 

Accrued interest on a savings account is calculated by determining the interest that has accumulated daily but hasn't yet been credited to your account. Banks use a simple formula: 

Accrued Interest = Principal x Interest Rate x Time (in days) / Days in Year  

Principal: The balance in the savings account.  

Interest Rate: The annual interest rate offered by the bank.  

Time: The number of days the interest has been accruing.  

Days in year: Generally, banks use 365 days for this calculation.  

For example, if you have ₹10,000 in a savings account with a 4% annual interest rate, and it's been 30 days since the last interest credit, you can calculate the accrued interest as:  

Accrued Interest = ₹10,000 X 0.04 X 30 / 365 = ₹32.88  

This amount will be credited to your account on the interest payout date.  

Types of accrued interest  

Simple  

This type of accrued interest is calculated on the principal amount alone. It’s straightforward: interest accumulates based on the original balance (principal) without considering previous interest. Most savings accounts and some loans use this method.  

For example, if you have ₹10,000 in a savings account with a 4% annual interest rate, the interest is calculated daily based on this ₹10,000 balance alone. 

Compound  

In compound interest, accrued interest is added to the principal, and future interest is calculated on this new amount (principal + accrued interest). Essentially, you earn interest on both the original amount and the accumulated interest. This leads to a faster growth of interest.  

For example, if you have ₹10,000 in an account with compounded interest, after each interest payout, the new balance (including the interest) is used to calculate the next cycle’s interest. 

Accrued interest on bonds 

Accrued interest on investments like bonds is the interest that builds up between the last coupon (interest payment) and the sale or purchase of the bond. If a bondholder sells the bond before the next interest payment, the buyer pays the seller for the interest that has accumulated since the last payment. This ensures fairness in bond transactions. 

Accrued expenses 

This type of accrued interest occurs when you owe interest on loans or other borrowings. It’s the interest that has built up on a loan but hasn’t been paid yet.  

For example, if you take a loan with monthly payments, the interest that accumulates between payments is considered accrued interest expense. 

On which instruments is accrued interest applicable? 

Savings account 

Interest accrues daily on the balance in savings accounts, but it’s typically credited quarterly. The accrued interest reflects the amount accumulated between the last interest payment and the current day, ensuring that account holders earn interest on their deposits during this period​. 

Investment instruments 

In bonds, accrued interest builds up between the coupon (interest) payment dates. If a bond is sold before the next payment, the buyer compensates the seller for the accrued interest. Fixed deposits also accrue interest daily, but payouts occur based on the chosen frequency (monthly, quarterly, etc. 

Loans  

For loans like personal or home loans, interest accrues daily on the outstanding balance. This accrued interest is added to the principal and increases the amount the borrower owes. Borrowers typically pay this accrued interest in their regular EMIs (Equated Monthly Instalments).  

Credit cards 

Credit cards have high interest rates, and accrued interest adds up daily on unpaid balances. This means if a cardholder doesn’t pay the full amount by the due date, interest accrues on the outstanding balance, increasing the total owed​.  

Learning about accrued interest is really important for anyone dealing with loans, credit cards or investments. If you’re borrowing money, knowing how interest builds up helps you keep track of what you owe and avoid surprises. For investors, understanding accrued interest means you can better plan when to cash in or reinvest your earnings. In simple terms, it helps you stay on top of your finances and make smarter choices​.