What is compound interest?
With compound interest, the interest you earn is added to your balance and then earns interest itself. Over long periods this snowball effect becomes the main source of growth. Albert Einstein is often (probably wrongly) quoted as calling it the eighth wonder of the world, but the maths really is that powerful.
Compound interest formula
- P = principal (amount invested)
- r = annual interest rate (as a decimal)
- n = times interest is compounded per year (1, 2, 4 or 12)
- t = time in years
Worked example
₹1,00,000 at 10% a year, compounded yearly, for 5 years: A = 1,00,000 × (1.10)5 = ₹1,61,051. The interest earned is ₹61,051.
How compounding frequency changes the result
₹1,00,000 at 8% for 5 years:
| Compounded | Maturity amount |
|---|---|
| Yearly | ₹1,46,933 |
| Half-yearly | ₹1,48,024 |
| Quarterly | ₹1,48,595 |
| Monthly | ₹1,48,985 |
Compound vs simple interest
₹1,00,000 at 10% a year:
| Period | Simple interest | Compound interest (yearly) |
|---|---|---|
| 5 years | ₹50,000 | ₹61,051 |
| 10 years | ₹1,00,000 | ₹1,59,374 |
| 20 years | ₹2,00,000 | ₹5,72,750 |
Over 20 years, compounding earns almost three times as much as simple interest. That is why starting to invest early matters so much. See it with regular monthly investing on the SIP calculator.
Where compound interest applies
- Fixed deposits and recurring deposits (usually quarterly).
- PPF and Sukanya Samriddhi (yearly).
- Mutual funds and stocks, where reinvested gains compound through rising prices.
- Loans and credit card debt, where it works against you. Unpaid credit card interest compounds monthly at very high rates.
For interest on the principal only, use the simple interest calculator.
Frequently asked questions
What is compound interest?
Compound interest is interest calculated on the principal plus all the interest already earned. Because each period’s interest is added to the balance, your money grows faster over time than with simple interest.
What is the compound interest formula?
A = P × (1 + r/n)^(n × t), where A is the final amount, P the principal, r the annual rate as a decimal, n the number of times interest is compounded per year and t the time in years. Compound interest is A − P.
Does compounding frequency make a big difference?
It helps, but modestly. ₹1 lakh at 8% for 5 years grows to about ₹1,46,933 with yearly compounding and ₹1,48,985 with monthly compounding. The rate and the time period matter far more.
How often do Indian banks compound interest?
Savings accounts and most fixed deposits in India compound quarterly. PPF and Sukanya Samriddhi compound yearly. Mutual fund returns effectively compound daily through NAV growth.
What is the Rule of 72?
Divide 72 by the annual rate to estimate how many years it takes for money to double with compounding. At 8%, money doubles in about 9 years; at 12%, in about 6 years.
Sources
Last updated 19 September 2026. Results are estimates for planning only and are not investment, tax or legal advice. See our disclaimer.