What is Accrued Interest? – Meaning & Calculation

Whenever you take debt, interest accrues on the amount borrowed, usually calculated based on a pre-determined interest rate. Accrued interest plays a key role for both borrowers and investors, as it helps determine the amount due for a loan, bond or other type of debt. 

Knowing how accrued interest calculation is carried out is crucial whether you’re borrowing or lending. Read on to learn more about this important concept.

Accrued Interest Meaning

As mentioned, it refers to the interest incurred on a loan or an investment within a specific timeline. However, it has not been paid or received yet. You must 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, an increase in all these factors increases the amount that is due. Similarly, the higher these factors, the more yields you get on the maturity of an investment instrument.

How is Accrued Interest Calculated?

Using the following formula of accrued interest calculation, you can get instant results.

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

Example of Accrued Interest Calculation

Understand what accrued interest is with examples provided below:

• On Loans

Say that Mr. X borrowed ₹1.5 lakhs at an annual interest rate of 8%, payable monthly. The total accrued interest 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

Assume Mr. Y bought a bond with a face value of ₹10,000, with interest payable semi-annually. Now, assume that the coupon rate is 5%. In that case, the amount of accrued interest in 60 days will be calculated as follows:

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

₹10,000 X (5/100/365) X 60 = ₹82.19

Types of Accrued Interest

Here are different classifications of accrued interest:

• Simple Interest

This is the basic interest calculation formula. Here, financial institutions calculate interest amount based on the interest rate percentage. Under this approach, the interest is added daily, weekly, monthly or annually.

• Compound Interest

Under this approach, financial institutions 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 represents how much you can make from accrued interest on various investment options. This includes deposits in fixed deposits, savings accounts, and bonds.

• Accrued Interest Expenses

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

Which Financial Products Use Accrued Interest?

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

• Savings Accounts

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

• Investment Accounts

FDs and RDs also provide accrued interest. However, the interest is comparatively higher as compared to savings accounts.

• Loans

Loans also offer this type of interest, depending on various parameters. These parameters are the principal amount, tenure, and interest rate, among others. These include personal, home, auto loans and more.

• Credit Cards

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

The interest rate on your deposits or borrowed amount is important, as it directly affects your pocket. This is why we at Fibe offer Instant Personal Loan online up to ₹5 lakhs at affordable interest rates. You can also enjoy the added benefits of quick approval and an easy application process. Download the Fibe Personal Loan App to get your funds quickly!

FAQs on Accrued Interest

How do I calculate accrued interest?

Here is the formula for accrued interest calculation:

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 the interest rate. As it doesn’t account for the interest already accrued, it remains constant. 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 as Tax Deducted at Source (TDS) as per the Income Tax Act of 1961.