How compound interest works
Compound interest is interest earned on your principal and on the interest already added. That is what makes it grow faster over time than simple interest. The formula is A = P(1 + r/n)^(nt), where P is the principal, r is the annual rate (as a decimal), n is how many times a year it compounds, and t is the number of years.
The more frequently interest compounds, monthly rather than yearly, the more you earn, because interest starts earning its own interest sooner. Try changing the compounding frequency above to see the effect.
Why compounding is powerful over time
The effect is modest over a year or two but dramatic over decades. Because each period's interest joins the principal and earns in the next period, the growth curve bends upward, the classic snowball. This is why starting to invest early matters so much: time is the biggest lever in compounding, often more than the rate.
Compounding frequency
- Yearly: interest added once a year.
- Half-yearly: twice a year, common for some deposits.
- Quarterly: four times a year, typical for many bank FDs.
- Monthly: twelve times a year, the fastest of these to grow.
A worked example
On ₹1,00,000 at 8% for 5 years compounded monthly, the maturity amount is about ₹1,48,985, so the interest is roughly ₹48,985. The same principal under simple interest would earn only ₹40,000. The extra ₹8,900 or so is the compounding effect, and it grows much larger over longer periods.
Frequently asked
What is compound interest?
Compound interest is interest calculated on both the original principal and the interest already accumulated. Unlike simple interest, which only ever applies to the principal, compounding lets your interest earn its own interest, so the balance grows faster the longer it is left.
What does compounding frequency change?
It changes how often interest is added to the balance. More frequent compounding, monthly rather than yearly, means interest starts earning its own interest sooner, producing a slightly higher return for the same annual rate. The difference is small over short periods and larger over long ones.
How is compound interest calculated?
Using A = P(1 + r/n)^(nt), where P is the principal, r is the annual interest rate as a decimal, n is the number of times interest compounds per year, and t is the number of years. The interest earned is A minus P. This calculator applies the formula for whichever frequency you choose.
Why is starting early so important?
Because compounding rewards time even more than rate. The longer money compounds, the more dramatically it grows, since the later years add interest on a much larger base. Two people investing the same amount at the same rate can end up far apart simply because one started years earlier.
Does this account for tax on interest?
No. The calculator shows gross compound growth. In practice, interest income may be taxable and TDS may be deducted, and inflation reduces real returns. Use the result to understand compounding, and factor in tax and inflation separately when planning.