Key points
- Simple interest is earned only on the original amount; compound interest is also earned on past interest.
- ₹1 lakh at 8% grows to ₹3.4 lakh in 30 years with simple interest, but to ₹10.1 lakh with yearly compounding.
- Time is the biggest driver: compounding is slow at first and very fast later.
- Rule of 72: divide 72 by the rate to estimate the years it takes to double.
Simple interest vs compound interest
Simple interest is calculated only on the principal: interest = P × R × T ÷ 100. ₹1,00,000 at 8% earns ₹8,000 every year, no matter how long you hold it.
Compound interest adds each period’s interest to the balance, so the next period’s interest is calculated on a larger amount: A = P × (1 + r/n)^(n × t), where n is the number of times interest is compounded each year.
| Years | Simple interest | Compounded yearly |
|---|---|---|
| 10 | ₹1,80,000 | ₹2,15,892 |
| 20 | ₹2,60,000 | ₹4,66,096 |
| 30 | ₹3,40,000 | ₹10,06,266 |
In the first 10 years the difference is modest. By year 30, compounding has produced almost three times as much. This is why long-term investing works — and why long-term debt is so expensive.
Compounding frequency
The more often interest is added, the faster the balance grows, though the effect is smaller than the effect of time or rate. ₹1 lakh at 10% for 10 years grows to ₹2,59,374 compounded yearly, ₹2,68,506 quarterly and ₹2,70,704 monthly. Bank FDs compound quarterly; PPF yearly; savings accounts calculate interest daily and credit it quarterly or monthly.
Starting early beats investing more
Two people invest ₹5,000 a month at 12%. One starts at 25, the other at 35, and both stop at 60. The early starter invests ₹21 lakh and ends with about ₹3.2 crore; the late starter invests ₹15 lakh and ends with about ₹95 lakh. Ten extra years of compounding more than triple the result.
The rule of 72
| Annual return | Years to double (72 ÷ rate) |
|---|---|
| 6% | About 12 years |
| 8% | About 9 years |
| 10% | About 7.2 years |
| 12% | About 6 years |
The same rule works against you: at 6% inflation, prices double in about 12 years, and credit card debt at 36% doubles in two.
Making compounding work for you
- Start as early as possible, even with small amounts.
- Reinvest returns rather than withdrawing them — choose growth or cumulative options.
- Keep costs low: a 1% higher expense ratio compounds against you every year.
- Avoid interrupting the process by breaking investments early.
- Repay high-interest debt quickly — compounding works just as hard for your lender.
Compounding on debt: the other side
Credit cards typically charge around 3%–3.75% a month on unpaid balances — over 40% a year once compounded. Leave ₹50,000 unpaid for a year at 3.5% a month and it grows to about ₹75,500 before GST and late fees. Paying only the “minimum amount due” keeps most of the balance compounding at that rate.
The same maths explains why long loan tenures are expensive and why prepaying early saves so much: interest on a large balance compounds against you for longer. Compounding is neutral — it simply rewards whoever is on the receiving end of the interest.
Frequently asked questions
What is the formula for compound interest?
A = P × (1 + r/n)^(n × t), where P is the principal, r the annual rate as a decimal, n the number of compounding periods a year and t the years. Compound interest = A − P.
Do fixed deposits use compound interest?
Yes. Cumulative bank FDs usually compound quarterly. Payout FDs pay the interest out instead, so it does not compound.
Is compound interest always better?
When you are earning, yes. When you are borrowing, compounding works against you — unpaid credit card interest, for example, compounds at 36% or more a year.