Compound interest is the foundation of most savings and investment products in India — from Fixed Deposits to mutual funds. Here is a plain-English explanation with the formula, a worked example, and a comparison with simple interest.
Compound interest is interest calculated not just on the original principal, but also on all the interest accumulated so far. In other words, you earn interest on your interest. This creates an exponential growth curve, which is why it is often called "the eighth wonder of the world."
In India, compound interest applies to Fixed Deposits (FDs), Recurring Deposits (RDs), Public Provident Fund (PPF), National Savings Certificate (NSC), and the returns modelled for mutual fund SIPs.
The standard formula used worldwide, and adopted by Indian banks and financial institutions, is:
The value of n depends on the compounding frequency:
| Compounding Frequency | n value | Common use in India |
|---|---|---|
| Yearly | 1 | PPF, NSC, some small savings schemes |
| Half-Yearly | 2 | Some corporate FDs |
| Quarterly | 4 | Most bank FDs (SBI, HDFC, ICICI) |
| Monthly | 12 | Monthly income plans, some RDs |
Suppose you deposit ₹1,00,000 in a bank FD at an interest rate of 10% per annum, compounded quarterly, for 5 years.
So your ₹1 lakh deposit grows to approximately ₹1.64 lakh after 5 years — an interest gain of ₹63,862.
Skip the manual calculation. Enter your principal, rate, time, and compounding frequency to get results instantly.
Open Compound Interest CalculatorThe frequency at which interest is compounded has a direct impact on the final amount. The more often interest is compounded, the more you earn — because each compounding cycle adds interest to a slightly larger balance.
Here is how different compounding frequencies compare for the same ₹1,00,000 at 10% p.a. over 5 years:
| Compounding | n | Total Amount | Interest Earned |
|---|---|---|---|
| Yearly | 1 | ₹1,61,051 | ₹61,051 |
| Half-Yearly | 2 | ₹1,62,890 | ₹62,890 |
| Quarterly | 4 | ₹1,63,862 | ₹63,862 |
| Monthly | 12 | ₹1,64,531 | ₹64,531 |
The difference between yearly and monthly compounding is ₹3,480 in this example — a gap that widens significantly with higher rates, larger principals, and longer durations.
Simple interest (SI) is calculated only on the original principal: SI = P × r × t. It grows linearly. Compound interest grows exponentially because each period builds on the last.
The ₹13,862 gap above represents the interest earned on previously accumulated interest — this is the compounding effect. Over 10 or 20 years, this difference becomes enormous.
Yes. Most Indian bank FDs use quarterly compounding. Enter your FD amount, the stated interest rate, and select "Quarterly" for an accurate estimate. The actual payout may differ slightly due to rounding or specific bank terms.
The calculator supports months directly — select "Months" as the time unit. Internally, the formula converts months to years by dividing by 12 before applying A = P(1 + r/n)^(nt).
The Public Provident Fund (PPF) compounds annually. Interest is calculated on the minimum balance between the 5th and last day of each month, but credited to the account at the end of the financial year.
Yes, for the same principal, rate, and duration, more frequent compounding always produces a higher total. However, the difference between quarterly and monthly compounding is small — a fraction of a percent. The biggest gains come from a higher rate or longer duration.
CAGR (Compound Annual Growth Rate) measures the average annual growth rate of an investment over a period, assuming growth compounds annually. The compound interest formula calculates the future value given a fixed rate and compounding frequency. CAGR is used to measure past performance; the CI formula is used to project future value.