Accrued Interest: A Quick Guide To An Important Financial Concept

In loan and investment accounting, accrued interest is an essential concept you must be aware of to make better financial decisions. Based on the type of account it is related to, it can help you generate income or increase your dues. Read on to learn more about this important concept. 

What is Accrued Interest?

Accrued interest is the interest incurred on a loan or an investment across a specific timeline that hasn’t been yet paid or received. You need to monitor it regularly as it dictates your overall borrowing costs or the returns you can earn on an investment.

How Accrued Interest Works?

The amount of interest accrued depends on several factors, some of which include:

• Principal amount
• Time
• Interest rate

In the case of a loan, accrued interest increases the repayment amount that is due. On the other hand, it increases the yields payable on the maturity of an investment instrument. 

Which Financial Products Use Accrued Interest?

Here are some financial products using the concept of interest accrual:

Savings Accounts

Savings accounts are the most basic type of accounts that banks provide. These accounts generally offer quite low-interest rates. However, these accounts help you save and allow you to earn interest on your savings. 

Investment Accounts

Investment accounts, like fixed and recurring deposits, also provide accrued interest. However, the interest rate on these accounts is comparatively higher as compared to savings accounts.

Loans

Different types of loans also accrue interest, depending on various parameters such as the principal amount, tenure, interest rate, among others. These include personal loans, home loans, auto loans and more.

Credit Cards

These forms of credit also accrue interest. However, note that credit cards have much higher interest rates when compared to personal loans or other types of secured loans. So, use them with care and based on a budget to avoid accumulating too much debt. 

Types of Accrued Interest 

Here are different classifications of accrued interest:

Simple Interest

Simple interest is the basic interest calculation where financial institutions calculate interest amount based on the percentage of interest rate. Under this approach, the interest accrues daily, weekly, monthly or annually.

Compound Interest

Under this approach, banks and NBFCs calculate the accumulated interest based on the principal amount and the interest accrued till the last payment. The interest grows more quickly under this approach compared to the simple interest method. 

Accrued Interest Income

This is the interest income that you can earn with accrual of interest on different investment instruments, like fixed deposits, savings accounts, bonds, etc.

Accrued Interest Expenses

Accrued expense is the type of accrued interest on a loan that is still payable. 

How is Accrued Interest Calculated?

You can calculate the amount of interest accrued using the accrued interest formula. 

Interest Accrued = Principal Amount X (Rate of Interest/365) X Accrual Period

Understand what is accrued interest with examples provided below:

On Loans

Say that Mr. X borrowed ₹1.5 lakhs at an annual interest rate of 8%, payable every month. The total amount of interest accrued in 30 days will be:

Amount of Interest Accrued = Principal Amount X (Rate of Interest/365) X Accrual Period

₹1,50,000 X (8/100/365) X 30 = ₹986.30

On Investments

Say that Mr. Y bought a bond with a face value of ₹10,000, with interest payable semi-annually. If the coupon rate of the bond is 5%, the amount of accrued interest in 60 days will be: 

Amount of Interest Accrued = Principal Amount X (Rate of Interest/365) X Accrual Period

₹10,000 X (5/100/365) X 60 = ₹82.19

When taking a loan, it is crucial to assess accruing interest to determine the cost of borrowing. At Fibe, you can get affordable Instant Personal Loans of up to ₹5 lakhs, with the added benefits of quick sanctioning and a simple application process. Download the Fibe Personal Loan App to get started and get your funds quickly!

FAQs on Accrued Interest 

How do I calculate accrued interest?

If you are wondering how to calculate accrued interest, you can use this mathematical formula for the same: 

Amount of Interest Accrued = Principal Amount X (Rate of Interest/365) X Accrual Period

What is the difference between interest and accrued interest?

Interest is the amount based on the original principal amount and rate of interest. As it doesn’t account for the interest already accrued, it remains constant over time. On the other hand, accrued interest is the amount you have earned but not yet received in the case of investment products.

Is the accrued interest taxable?

Yes, the amount accrued as interest is taxable in India in the form of Tax Deducted at Source (TDS) as per the Income Tax Act of 1961.