NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products

Accrued Interest and Cum/Ex-Interest Bond Transactions: Tax Treatment

Updated 11 October 2026 · Fact-checked

Accrued interest is the coupon earned since the last payment date. On a cum-interest trade the buyer pays it to the seller. The seller taxes it as interest income. The buyer sets it off against the full coupon received. It is kept out of cost and sale value, so capital gain uses the clean price only.

Understand Bond Stripping, Accrued Interest and Cum/Ex-Interest Transactions

A bond pays interest on fixed dates, but you earn it every day. If you sell between two coupon dates, the buyer will collect the entire next coupon. So the buyer compensates you for the days you held the bond. That amount is accrued interest.

The clean price is the bond price without accrued interest. The dirty price (invoice price) is the clean price plus accrued interest. The money that actually changes hands is the dirty price.

A cum-interest trade is done before the record date. The buyer gets the next coupon, so the buyer pays accrued interest to the seller. An ex-interest trade is done after the record date. The seller keeps the coming coupon, so the price is quoted without it, and the buyer pays no accrued interest for that coupon.

Tax follows the same split. Interest is income and capital gain is a gain on the asset. Do not mix them. The accrued interest you receive as seller is interest income. The accrued interest you pay as buyer is not part of the cost of the bond. It is adjusted against the interest you later receive. Only the clean price enters the capital gain computation.

Bond stripping means separating a bond's coupons and its principal into separate zero-coupon pieces, each traded on its own. Bond washing means selling a bond just before interest is paid and buying it back (or buying a similar one) just after, so that interest turns into a capital item or a loss. Tax law has anti-avoidance rules aimed at such arrangements around the interest date. Learn the idea and what the NISM workbook says about it. Do not invent time limits.

Key formulas to remember

Accrued interest: Accrued interest = Face value × Coupon rate × Days since last coupon ÷ Days in year; The day-count basis (30/360 or actual) is given in the question. Use what is stated.
Dirty (invoice) price: Dirty price = Clean price + Accrued interest; This is the cash the buyer pays on a cum-interest trade.
Seller's interest income: Interest income of seller = Accrued interest received (for the days held); Taxed as interest, normally under Income from Other Sources unless the bonds are business stock.
Buyer's taxable interest: Net interest taxable = Full coupon received − Accrued interest paid at purchase; This leaves only the interest for the days the buyer actually held the bond.
Capital gain on sale: Capital gain = Clean sale price − Selling expenses − Clean cost of acquisition; Accrued interest is excluded from both sale value and cost. Holding period decides short-term or long-term.
Ex-interest trade: Ex-interest: buyer pays no accrued interest for the coming coupon; seller keeps that coupon; The seller then taxes the coupon received as interest income.

How to solve Bond Stripping, Accrued Interest and Cum/Ex-Interest Transactions questions

Split every bond question into an interest part and a capital part. Handle them separately and do not let accrued interest leak into the gain.

1Read whether the trade is cum-interest or ex-interest. Check the dates against the record date and coupon date.
2Find the last coupon date and count the days to the trade date, using the day-count basis given.
3Compute accrued interest = Face value × Coupon rate × Days ÷ Basis.
4Separate the price paid or received into clean price and accrued interest. If only the dirty price is given, subtract accrued interest.
5Interest side: the seller taxes the accrued interest received. The buyer deducts accrued interest paid from the next full coupon received.
6Capital side: gain = clean sale price − expenses − clean cost. Do not add accrued interest to either.
7Check the holding period and whether the bond is listed, then classify the gain as short-term or long-term as the question's rules state.
8If the question describes a sale just before interest and a buyback just after, flag it as bond washing and apply the anti-avoidance idea.

Quickest way: Clean price in, interest out

When to use it: Use in MCQs that give a dirty price and ask for the capital gain or the taxable interest.

Compute accrued interest first, from the days given.
Strip it out of every price. Work only with clean prices for capital gain.
Seller: accrued interest is interest income. Buyer: accrued interest paid reduces the next coupon's taxable amount.
Cum-interest means the buyer pays accrued interest. Ex-interest means the buyer does not pay it.
Eliminate options that add accrued interest to cost or to sale value.

Common mistakes in Bond Stripping, Accrued Interest and Cum/Ex-Interest Transactions

Adding accrued interest to the cost of acquisition
The buyer actually paid it, so it feels like part of the cost.
Fix: It is a payment for interest, not for the bond. Cost for capital gains is the clean price plus eligible purchase expenses.
Treating the accrued interest the seller receives as sale consideration
The dirty price is the one amount in the contract note.
Fix: Split the dirty price. The accrued portion is interest income. Only the clean portion is sale value.
Taxing the buyer on the full coupon with no adjustment
The buyer receives the full coupon in cash.
Fix: Deduct the accrued interest paid at purchase from the coupon. The buyer is taxed only on interest for the days held.
Mixing up cum-interest and ex-interest
The words sound similar and 'ex' feels like 'including'.
Fix: Cum means with the coming coupon, so accrued interest is paid. Ex means without it, so none is paid.
Miscounting days or using the wrong day-count basis
Students default to actual days when the question says 30/360, or the other way round.
Fix: Underline the basis in the question. Count from the last coupon date to the trade date.
Treating bond washing as a legitimate way to get a capital loss
On paper the sale shows a lower price after the interest is paid.
Fix: Remember it is an anti-avoidance target. Sale just before the interest date with a buyback just after is a red flag, not a planning tool.

Worked examples

Example 1

Anil buys 100 bonds of face value ₹1,000 each (total face value ₹1,00,000) on 30 September at a clean price of ₹98,000. The coupon is 9% a year, paid every 31 March. Assume six full months have accrued, and the bond is cum-interest. On 31 March Anil receives the full coupon. Find the accrued interest he pays, his cash outlay, and his net taxable interest for the year.

Show the solution

Accrued interest = ₹1,00,000 × 9% × 6 ÷ 12 = ₹4,500.
Cash paid = clean price + accrued interest = ₹98,000 + ₹4,500 = ₹1,02,500.
Cost of acquisition for capital gains = ₹98,000 only.
Full coupon received on 31 March = ₹1,00,000 × 9% = ₹9,000.
Net taxable interest = ₹9,000 − ₹4,500 = ₹4,500. This equals the interest for the six months Anil held the bond.

Answer: Accrued interest paid ₹4,500. Cash outlay ₹1,02,500. Cost for capital gains ₹98,000. Net taxable interest ₹4,500.

Example 2

Meera holds bonds of total face value ₹1,00,000 with a 10% annual coupon, last paid on 31 March. She bought them 18 months earlier at a clean cost of ₹95,000. She sells on 30 June (cum-interest, three months accrued) and receives a total of ₹1,01,500. Selling expenses are ₹500. The bonds are listed. Find her interest income and capital gain, and classify the gain.

Show the solution

Accrued interest = ₹1,00,000 × 10% × 3 ÷ 12 = ₹2,500.
Clean sale price = ₹1,01,500 − ₹2,500 = ₹99,000.
Interest income of Meera = ₹2,500, taxed as interest.
Capital gain = ₹99,000 − ₹500 − ₹95,000 = ₹3,500.
Holding period is 18 months, which is more than 12 months for a listed bond, so the gain is long-term.

Answer: Interest income ₹2,500. Long-term capital gain ₹3,500. Do not compute the gain on the ₹1,01,500 received.

Exam tips

If an option computes gain using the full amount received or paid, it is almost always the trap. Prefer the clean-price option.
Do the accrued interest calculation first. Most wrong answers come from skipping it.
Note the day-count basis and the record date in the question before you do anything else.
Wrong answers cost 25% of the marks assigned to the question. On a 2-mark caselet question, skip rather than guess blindly.
For bond washing and stripping, know the definition and the purpose. Do not give limits or rates that the workbook does not state.

Practice questions from Taxation of Debt Products

Bond Stripping, Accrued Interest and Cum/Ex-Interest Transactions: frequently asked questions

Is accrued interest on a bond purchase deductible?

It is not part of the cost of the bond. The buyer adjusts it against the interest received on the next coupon, so only the interest for the days held is taxed. Follow the treatment in the NISM workbook for the exam.

How do I compute capital gain on a bond sale with accrued interest?

Remove accrued interest from the price first. Then capital gain = clean sale price − selling expenses − clean cost of acquisition. The accrued interest received is taxed separately as interest income.

What is the difference between cum-interest and ex-interest?

In a cum-interest trade the buyer receives the next coupon and so pays accrued interest to the seller. In an ex-interest trade the seller keeps the next coupon, so the buyer pays no accrued interest for it.

What is bond washing?

It is selling a bond just before interest is paid and buying it back or a similar one just after. The aim is to turn interest into a capital item or a loss. Tax law has anti-avoidance rules to counter such arrangements.