Compound interest is interest earned on interest. In every period, the interest is added to your principal, and the next period's interest is calculated on that bigger amount. Over long periods this makes money grow much faster than simple interest. It works the same way against you on loans and credit card dues.
How to use the compound interest calculator
- Enter the principal amount.
- Enter the yearly interest rate.
- Choose the time period in years.
- Choose how often interest is compounded: yearly, half-yearly, quarterly, monthly or daily.
The calculator shows the total amount and the interest. The year-wise breakdown shows the interest earned in each year and the balance at the end of it. Notice how the yearly interest keeps growing.
Compound interest formula
A = P × (1 + r ÷ n)^(n × t)
CI = A − P- A = final amount
- P = principal
- r = yearly interest rate ÷ 100
- n = compounding periods per year (1, 2, 4, 12 or 365)
- t = time in years
Example
You invest ₹1,00,000 at 8% for 5 years, compounded yearly.
- A = 1,00,000 × (1.08)^5
- Total amount = ₹1,46,933
- Compound interest = ₹46,933
Effect of compounding frequency
₹1,00,000 at 8% for 5 years:
| Compounding | Total amount |
|---|---|
| Yearly | ₹1,46,933 |
| Half-yearly | ₹1,48,024 |
| Quarterly | ₹1,48,595 |
| Monthly | ₹1,48,985 |
| Daily | ₹1,49,176 |
Compound vs simple interest
₹1,00,000 at 8% a year, compounded yearly:
| Years | Simple interest | Compound interest |
|---|---|---|
| 5 | ₹40,000 | ₹46,933 |
| 10 | ₹80,000 | ₹1,15,892 |
| 20 | ₹1,60,000 | ₹3,66,096 |
In the first few years the gap is small. Over 20 years, compounding earns more than twice as much as simple interest. See the simple interest calculator for the other side.
The rule of 72
Divide 72 by the interest rate to estimate how many years it takes to double your money. At 8%, 72 ÷ 8 = 9 years. The exact answer is 9.01 years, so the shortcut is very close.
FAQ
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus the interest already earned, so it grows faster.
Which compounding frequency gives the most interest?
The more often interest is compounded, the higher the final amount. Daily compounding gives slightly more than monthly, which gives more than quarterly, and so on. The difference is usually small compared with the effect of the rate and time.
How do I calculate compound interest for months?
Convert the months into years and enter that in the time field. For example, 18 months is 1.5 years and 6 months is 0.5 years.
Where is compound interest used in India?
Bank FDs (quarterly), recurring deposits, PPF (yearly), savings accounts, most investments, and on the loan side, credit card dues and unpaid loans.