What is the Simple vs Compound Interest?
Simple interest is earned only on the original principal. Compound interest is earned on principal plus all accumulated interest — so the base itself grows each period.
Over short periods the difference is small. Over decades it dominates everything else, which is why Einstein's apocryphal remark about compounding being the eighth wonder persists.
Formula & worked example
Compound = P × (1 + r/f)f×n − P
Worked example: ₹5,00,000 at 10% for 15 years. Simple interest earns ₹7,50,000, for a total of ₹12.5 lakh. Compounded annually it earns ₹15.88 lakh, totalling ₹20.88 lakh — compounding adds ₹8.38 lakh, more than the principal itself.
How to use this simple vs compound interest calculator
- Enter the principal and annual rate.
- Set the time period — the gap widens dramatically beyond 10 years.
- Choose compounding frequency; more frequent compounding earns slightly more.
- Watch the difference column grow non-linearly in the table.
Smart tips
- Compounding frequency matters less than time. Monthly versus annual adds a little; ten extra years transforms the outcome.
- The same maths works against you on debt. Credit card interest compounds monthly at 3–4%.
- Use the Rule of 72: divide 72 by the rate to estimate the doubling period. At 10%, money doubles in about 7.2 years.
- Most Indian FDs compound quarterly; PPF and NSC compound annually; loans use monthly reducing balance.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is earned only on the principal. Compound interest is earned on principal plus previously earned interest, so growth accelerates.
Which investments use compound interest?
FDs, PPF, EPF, NSC and mutual funds all compound. Some loans and short-term instruments use simple interest.
Does compounding frequency make a big difference?
A modest one. At 10%, monthly compounding yields about 10.47% effective versus 10% annually — meaningful but far less than adding years.
What is the Rule of 72?
Divide 72 by the annual rate to estimate years to double. At 8% it is about 9 years; at 12%, about 6.
Want the theory behind the numbers? Read our interest guides on the Money Blog.