Simple vs Compound Interest
See exactly how much more your money earns when interest compounds — simple interest, compound interest and the compounding advantage, side by side.
Year-by-year growth
Balance at the end of each year| Year | Simple amount | Compound amount | Compound gain |
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Disclaimer: Indicative estimate assuming a constant rate and no withdrawals or taxes. Actual returns vary with the product, payout cycle and TDS. For education only.
Simple vs compound interest — what's the difference
Both grow your money, but they grow it differently. Simple interest is calculated only on the original principal, so you earn the same amount every year. Compound interest is calculated on the principal plus the interest already earned — so each year's interest earns interest of its own. Over long tenures, that gap becomes dramatic.
Interest stays flat because it is always computed on the starting principal. Common in short-term personal loans, car loans and some fixed deposits that pay out interest each period.
Amount = P + SI
Interest is added back to the balance, so the base keeps growing. This is how most savings, cumulative FDs, PPF, mutual funds and long-term wealth actually build up.
CI = Amount − P (f = times/year)
Worked example — ₹1,00,000 at 8% for 5 years
Take a principal of ₹1,00,000 at 8% p.a. for 5 years, with interest compounded annually. Simple interest earns a flat amount each year; compound interest earns a little more each year as the balance grows. Here is how the two compare.
Key terms explained
Principal (P)
The original sum you invest or borrow. Simple interest is always a fixed percentage of this figure; compound interest starts here and then grows on top of the accumulated balance.
Compounding frequency (f)
How many times a year interest is added back — annually (1), half-yearly (2), quarterly (4) or monthly (12). More frequent compounding means a higher maturity value for the same rate.
The Rule of 72
A quick shortcut: divide 72 by the annual rate to estimate how many years compound interest takes to double your money. At 8%, that's 72 ÷ 8 ≈ 9 years.
Effective annual rate
When interest compounds more than once a year, the effective yield is higher than the stated nominal rate. 8% compounded monthly actually returns about 8.30% a year.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal — P × R × T ÷ 100. Compound interest is calculated on the principal plus the interest already accumulated, so the base grows each period.
How much difference does compounding make?
Little in the first years and a great deal later. At 10% over 20 years, simple interest triples your money while annual compounding multiplies it nearly seven times. The gap widens with time and with the frequency of compounding.
Does compounding frequency matter?
Yes. Quarterly compounding produces more than annual, and monthly more than quarterly, at the same nominal rate. That is why the effective annual rate, not the nominal rate, is the correct basis for comparing deposits.
Which do Indian banks use?
Fixed and recurring deposits are usually compounded quarterly. Savings account interest is calculated daily and credited quarterly. Loan EMIs are computed on a monthly reducing balance, which is a form of compounding in the borrower's favour compared with a flat rate.
What is a flat interest rate on a loan?
One calculated on the original amount for the whole tenure, ignoring repayments. A flat rate always overstates value — the equivalent reducing-balance rate is roughly 1.8 to 1.9 times the flat rate.
Disclaimer: This tool gives indicative results for general guidance only and is not professional advice. Please verify with a qualified CA before acting on the numbers.