The formula, unpacked
A = P × (1 + r/n)^(n×t): P is the principal, r the annual rate as a decimal, n how many times per year interest compounds, and t the years. Each compounding period, interest is added to the balance, and the next period's interest is computed on that bigger balance — interest earning interest is the whole trick.
₹1 lakh at 8% for 5 years: compounded yearly it becomes ₹1,46,933; quarterly, ₹1,48,595; monthly, ₹1,48,985. Same rate, same time — the frequency alone added ₹2,000. That gap grows with time and rate, which is why comparing products by advertised rate alone can mislead.
Where each frequency shows up in real life
Different products compound differently, and it pays to know which you're holding:
- Bank FDs in India: quarterly — our FD calculator uses exactly this.
- Savings accounts: interest calculated daily on the balance, credited quarterly.
- PPF and most small-savings schemes: yearly.
- Home and personal loan interest: computed monthly on the reducing balance — compounding working against you.
- Credit cards: monthly at 3–4% per month, which compounds to a brutal 42–60% a year. The formula explains why card debt snowballs.
Two mental shortcuts worth memorising
The Rule of 72: divide 72 by the annual rate to estimate the years needed to double your money. At 8%, money doubles in about 9 years; at 12%, about 6. It's accurate within months for rates between 4% and 15% — good enough for every dinner-table decision.
The order-of-growth intuition: doubling time halving means the last years dominate. ₹1 lakh at 12% is ₹3.1 lakh after 10 years but ₹29.96 lakh after 30 — the third decade alone adds more than the first two combined. Compounding rewards whoever starts earliest, more than whoever invests hardest.
Frequently asked questions
›What is the compound interest formula?
A = P × (1 + r/n)^(n×t), where P is principal, r the annual rate as a decimal, n the compounding periods per year, and t the time in years. Compound interest earned = A − P. The calculator above applies this exactly for any frequency.
›What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal every period — ₹1 lakh at 8% simple earns a flat ₹8,000 every year. Compound interest is calculated on principal plus accumulated interest, so the amount grows faster each year: ₹46,933 versus ₹40,000 over 5 years in that example.
›Does compounding frequency really matter?
Yes, but modestly: ₹1 lakh at 8% for 5 years gives ₹1,46,933 yearly-compounded versus ₹1,48,985 monthly — about 1.4% more. Frequency matters most at high rates and long durations, which is why credit-card debt (monthly, 36-48% annual) explodes while FD differences stay small.
›What is the Rule of 72?
A quick estimate of doubling time: 72 ÷ annual rate ≈ years to double. At 6% money doubles in ~12 years, at 12% in ~6 years. It works because of the mathematics of logarithms, and stays accurate for rates between roughly 4% and 15%.
›Is FD interest simple or compound?
Cumulative FDs compound quarterly — interest joins the principal every three months. Payout FDs, which transfer interest to your account monthly or quarterly, effectively pay simple interest since the interest never stays to compound. That's why cumulative FDs mature to more.