What is the difference between simple and compound interest?

Simple interest is computed only on the original principal: P × r × t. Compound interest is computed on principal plus the interest already earned, so it grows faster the longer the period and the more often it compounds. Over one year at the same rate the two are close; over ten they diverge sharply.

How does compounding frequency change the result?

The nominal annual rate is divided by the number of periods and applied that many times a year. Monthly compounding at 12 percent gives an effective 12.68 percent a year; daily gives 12.75 percent; annual gives exactly 12. The calculator shows the effective annual rate for whatever frequency you choose.

Which interest applies to loans in India?

Most bank loans, including home and personal loans, use monthly reducing-balance interest, which is compound interest applied to the outstanding principal each month. Informal loans and some legal awards use simple interest. Fixed deposits compound quarterly.

What is the effective annual rate?

The rate that, compounded once a year, would give the same result as the nominal rate at its actual frequency: (1 + r/n)^n − 1. It is the right figure to compare two offers that compound differently.

How is interest taxed?

Interest you earn is income at your slab rate. Interest you pay on business borrowing is deductible; on a home loan it is deductible under Section 24 up to ₹2 lakh for a self-occupied house under the old regime.

Simple & Compound Interest Calculator

Both kinds of interest side by side for the same principal, rate and period, at any compounding frequency.

Switch tool

Principal (₹)

₹

Annual rate

Period

years

Compounding frequency

Comparison

Simple interestP × r × t

₹ 50,000

Compound interestannual

₹ 61,051

Extra from compounding

₹ 11,051

Effective annual rate

10.00%

Amount with compound interest

₹ 1,61,051

Illustrative only. Nominal annual rate assumed constant. Interest earned is taxable at slab rate.

How it works

Simple

Interest only on the original principal, every period.

Compound

Interest on principal plus accumulated interest, at the frequency you choose.

Effective rate

What the nominal rate is really worth once compounding is counted.

The same rate, two very different outcomes

A 10 percent rate means different money depending on whether it is simple or compound and how often it compounds. Enter the principal, rate and period once and see both results, the gap between them and the effective annual rate, which is the number to use when comparing offers that compound differently.

Five frequencies

Yearly through daily.

Side by side

Simple and compound on one screen, with the difference called out.

Effective annual rate

Converts any nominal rate and frequency to a comparable figure.

Fractional periods

Enter 2.5 years and both formulas handle it.