Accrued Interest
Accrued interest is the coupon income that has accumulated on a bond since the last coupon payment date, forming the difference between the 'dirty price' (all-in settlement price) and the 'clean price' (price quoted in the market excluding accrued interest).
When a bond is traded between coupon payment dates, the buyer is purchasing the right to receive the full next coupon, even though the seller held the bond for part of the coupon period. To compensate, the buyer pays the clean market price plus the accrued interest attributable to the seller's holding period. The total amount the buyer pays is called the dirty price or full price.
In Indian government securities, the convention for calculating accrued interest uses an actual/actual day count basis (the actual number of days elapsed divided by the actual number of days in the coupon period). For a 10-year G-Sec with a 7 per cent coupon (semi-annual), if 45 days have elapsed since the last coupon payment in a 183-day coupon period, the accrued interest on a Rs 100 face value bond would be: 3.50 × (45/183) ≈ Rs 0.861.
The clean price is what is quoted on trading platforms, Bloomberg, and the NDS-OM (Negotiated Dealing System – Order Matching) operated by the Clearing Corporation of India (CCIL). Settlement, however, occurs at the dirty price. This distinction matters for accounting: under Ind AS 32/109, bonds are carried at amortised cost or fair value, and accrued interest is recorded as a separate asset, not included in the bond's carrying value.
For mutual funds, the NAV calculation incorporates accrued interest on daily basis using the relevant day count convention. Daily accrual ensures that NAV reflects the economic income earned each day, providing smooth returns that don't spike on coupon payment dates.
For tax purposes, the tax treatment of accrued interest received by a seller depends on whether the security was held as a trading asset or investment. If the seller is a bank, accrued interest received is treated as interest income. For individuals trading bonds, the treatment is less uniform and has been a subject of periodic clarification in tax circulars.