The formation of calcareous coated grains like ooids and oncoids have been extensively researched. In contrast, the origin and genesis of ferruginous coated grains are less clear. Radically different processes like surficial weathering, hydrothermal exhalation and microbial activity have been advocated for the source of iron and the development of coatings. Modern examples are sparse and from marine environments affected by igneous activity. This study presents the features of ferruginous coated grains found in freshwater lacustrine–palustrine deposits of the Lower Jurassic syn‐rift strata of the Pranhita–Godavari Basin, India. The coated grains occur in metre‐thick lenticular bodies of nodular limestones enclosed in black mudstones containing plant debris and sulphates (gypsum and baryte). In the nodular limestones, sand‐size coated grains, along with chert and quartz grains, float in a micritic groundmass. Angular quartz grains embedded in dark, amorphous haematite–goethite constitute the nuclei of the coated grains. Cortices comprise numerous, thin, wavy laminae of goethite with trapped detrital grains. These coated grains are typically devoid of carbonates, although the outermost part of the cortex is replaced by calcite spars to varying extent. The black mudstone‐nodular limestone association occurs in between siliciclastic lacustrine deposits (laminated red and green mudstones) below, and the palustrine limestones‐green shale association above. The palustrine limestones contain remains of aquatic organisms, evidence of desiccation, paedogenesis, microbial‐mat formation, chert, baryte and gypsum layers. A few decimetre‐scale, wedge‐shaped, flood‐derived cross‐bedded sandstones occur locally. Due to the proximity of the depositional area to the marginal fault system of the rift basin and association of the limestones containing coated grains with sub‐aerially weathered microbialites, these ferruginous coated grains are ideally poised for a comparative assessment of various hypotheses of solute supply and precipitation. Based on field, microscopic and chemical characteristics, it is possible to conclude that microbially mediated precipitation in hydrothermal (hot spring)‐influenced pools is the most probable origin for these ferruginous coated grains.