Compound Interest Calculator

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods — commonly called "interest on interest." Simple interest, by contrast, is calculated only on the original principal and grows linearly. Over long periods, compound interest grows exponentially while simple interest remains proportional. For example, ₹1 lakh at 12% for 10 years: compound interest (quarterly) gives ₹3.26 lakhs, while simple interest gives only ₹2.2 lakhs — a difference of over ₹1 lakh.

The Rule of 72 is a quick mental shortcut to estimate how many years it takes to double your money — simply divide 72 by the annual interest rate. At 12% compounding, your money doubles in 72 ÷ 12 = 6 years. At 6%, it takes 12 years. At 9%, approximately 8 years. The rule is surprisingly accurate for interest rates between 5% and 20% and is one of the most useful rules of thumb in personal finance for rapid mental calculations.

Higher compounding frequency means interest is added more often, so each subsequent calculation includes more accumulated interest. For ₹1 lakh at 10% over 10 years: annual gives ₹2,59,374; quarterly gives ₹2,68,506; monthly gives ₹2,70,704; and daily gives ₹2,71,791. The difference is modest at low principals but becomes significant at ₹10–50 lakh and 15–20 year tenures. Always check whether your FD or investment uses quarterly or monthly compounding.

The Effective Annual Rate (EAR) is the actual annual return you receive after accounting for compounding frequency within the year. It is calculated as EAR = (1 + r/n)^n − 1, where r is the nominal rate and n is the number of compounding periods. A 12% nominal rate compounded monthly gives an EAR of 12.68%. The EAR is the correct metric to compare two investments with different compounding frequencies — always compare EARs, never nominal rates.

Mutual fund NAVs (Net Asset Value) grow daily, which is equivalent to daily compounding of underlying returns. When you stay invested in a growth-option mutual fund, your entire corpus — including all previous gains — earns returns on the next day's growth. This is why switching to the IDCW (dividend) option breaks compounding: every dividend payout removes money from the compounding base. For long-term wealth, always choose the growth option in mutual funds.

Bank FDs in India use compound interest, typically compounded quarterly. However, if you opt for interest payout (monthly or quarterly) instead of cumulative, it effectively becomes simple interest because the interest is removed before it can compound. For maximum benefit, always choose the cumulative FD option where interest compounds and is paid out only at maturity. Post Office deposits compound annually.

A SIP (Systematic Investment Plan) harnesses compounding in two ways: each instalment earns returns that compound over its remaining tenure, and earlier instalments benefit from more years of compounding than later ones. While SIP is not technically "compound interest" in the traditional sense, the underlying mutual fund's daily NAV growth creates an equivalent compounding effect. The longer the SIP tenure, the more dramatically the earlier instalments compound — which is why the last few years of a long SIP produce the highest absolute rupee gains.

For the highest compounding returns over 10+ years, equity mutual funds (SIP or lumpsum) with 12–15% historical CAGR are the best option despite market risk. For guaranteed compounding, PPF at 7.1% (annual compounding, tax-free) and bank FDs at 6.5–8% (quarterly compounding) are reliable. SSY offers 8.2% for a girl child. NPS compounds at approximately 9–12% with tax benefits. The "best" depends on your risk tolerance, tax bracket, and investment horizon.

Inflation reduces your real (purchasing power-adjusted) returns significantly. If your investment earns 8% and inflation is 6%, your real return is approximately 1.89% — not 2%, due to the multiplicative nature of compounding. Over 20 years, ₹10 lakh at 8% nominal grows to ₹46.6L, but in today's purchasing power at 6% inflation, that's equivalent to only ₹14.5L. Always think in real returns, not nominal returns, when evaluating long-term wealth creation.

Absolutely — compounding is brutally powerful on the debt side. Credit card debt at 3.5% per month compounds to 51.1% EAR. A personal loan at 18% p.a. compounding monthly gives 19.56% EAR. Missing EMIs triggers compound interest on outstanding dues. If you have credit card debt, compounding is actively destroying your wealth every month — the interest rate on debt almost always exceeds investment returns, making debt repayment the highest-return "investment" available.