Simple interest vs compound interest
When you deposit or lend money, interest is the reward for letting someone else use it. Simple interest is calculated only on the original amount, so it is the same every year. Compound interest is calculated on the original amount plus the interest already added, so it grows faster over time. Bank fixed deposits, savings accounts, PPF and most investments use compound interest; some short-term loans and bonds use simple interest.
How to use the calculator
- Enter the principal (the starting amount), the annual interest rate and the time in years.
- Choose how often interest is compounded. Indian bank FDs usually compound quarterly.
- Compare the simple and compound results and see how much extra compounding earns.
The formulas
Simple interest: SI = P × R × T
Compound amount: A = P × (1 + R ÷ n)n × T
Compound interest: CI = A − P
P is the principal, R the annual rate as a decimal (7% = 0.07), T the time in years and n the number of times interest is compounded per year.
Worked example
₹1,00,000 at 7% for 5 years:
- Simple interest = 1,00,000 × 0.07 × 5 = ₹35,000, so you receive ₹1,35,000.
- Compounded quarterly: A = 1,00,000 × (1 + 0.07 ÷ 4)20 ≈ ₹1,41,478, which is about ₹6,478 more than simple interest.
Effective annual rate
More frequent compounding gives a slightly higher real return. The effective annual rate shows what the rate is really worth over one year: 7% compounded quarterly is equal to 7.186% compounded once a year. Use it to compare deposits that compound at different frequencies.
The Rule of 72
A quick mental shortcut: divide 72 by the interest rate to estimate how many years it takes to double your money with compound interest. At 8%, money doubles in about 72 ÷ 8 = 9 years.
Frequently asked questions
Is FD interest taxable?
Yes. In India, FD interest is added to your income and taxed at your slab rate, and banks may deduct TDS.
How do I calculate returns on monthly investments?
For regular monthly investing, use the SIP Calculator.
Does daily compounding make a big difference?
Compared with monthly compounding, very little. The big jump is from simple to compound interest.
Results are estimates for planning purposes. Actual returns depend on the product terms and taxes.