Internal fragmentation is a type of fragmentation that occurs when the memory is split into fixed-sized blocks, and the memory allocated to a process is slightly larger than the memory demanded. The difference between the allocated and demanded memory is known as internal fragmentation. When a process is allocated to a memory block, and if the process is smaller than the amount of memory requested, a free space is created in the given memory block. Due to this, the free space of the memory block is unused, which causes internal fragmentation.

In summary, internal fragmentation occurs when there is unused space within a memory block allocated to a process, which cannot be used by another process. This can lead to a waste of memory over time and can cause performance degradation in the system.