AlGaN/GaN heterostructures with different thicknesses of AlN interlayer (AlN-IL) were grown by metal organic chemical vapour deposition (MOCVD) system. The results obtained from atomic force microscopy revealed that, surface roughness decreases with increase in the interlayer thickness. Scanning electron microscopy and transmission electron microscopy images portrayed good interfaces between AlGaN/GaN heterostructures containing AlN as the IL. From the high-resolution X-ray diffraction data, the aluminium composition was estimated as 21–24%, and the AlGaN layer thicknesses were found to be 22–26 nm in the AlGaN layers using the epitaxy smooth fit software. Using reciprocal space mapping, the strain between AlGaN and GaN layers scanned along (1 0 5) plane were analyzed for the AlGaN/GaN heterostructures. Photoluminescence (PL) spectroscopy revealed a significant shift in the AlGaN peaks for samples both in the presence and absence of AlN-IL. Time resolved photoluminescence results exhibit dominate decay time in AlGaN/GaN heterostructures samples containing AlN-IL of around 3 nm thick. It is to be noted that, mobility increased from 1246 to 2000 cm2/volt-sec due to the presence of AlN-IL at 300 K.