Broken Period Interest Paid by a Purchaser of Debt Securities
This article explains how broken period interest is treated for income-tax purposes, with reference to the Supreme Court's 2024 ruling in the case of Bank of Rajasthan Ltd.
It matters to banks, treasuries and investors in bonds and government securities because the characterisation decides whether the amount reduces taxable income immediately, is added to the cost of the security, or is taxed in the seller's hands as interest. It also bears on assessments and appeals in which the point was raised in earlier years.
Part 1: What Broken Period Interest Is
Broken period interest is the interest accrued on a bond or government security from the last coupon date up to the date of purchase or sale. A buyer pays the seller the agreed clean price and, in addition, the interest accrued to date; the total is the full (dirty) price. On the next coupon date the buyer receives the interest for the whole coupon period.