Guides / Simple vs Compound Interest: The Difference in Rupees

Simple vs Compound Interest: The Difference in Rupees

Simple interest is calculated only on your original amount. Compound interest is calculated on the original amount plus the interest already earned.

₹1 lakh at 8% a year

After 20 years compounding gives about ₹2 lakh more. The gap grows with time.

The formulas

• Simple: Interest = P × r × t ÷ 100
• Compound: A = P × (1 + r/n)^(n×t)

Where you meet each one

• Simple: some personal loans, short-term lending, certain bonds.
• Compound: savings accounts, fixed deposits, PPF, mutual funds and most credit-card debt.

A useful shortcut

The rule of 72: divide 72 by the yearly rate to estimate the years needed to double your money. At 8% it takes about 9 years.

Compounding also works against you on debt. A credit card balance grows quickly because unpaid interest is added to the amount you owe.

Try both with the Simple Interest Calculator and the Compound Interest Calculator.