Interest on interest
With simple interest you earn only on the money you put in. With compound interest, each period's interest is added to the balance and earns interest itself. Early on the difference is small; over decades it becomes the biggest part of your money.
A = P × (1 + r/n)^(n × t)
Effective annual rate = (1 + r/n)^n − 1Worked example
How often does interest compound in India?
| Product | Compounding |
|---|---|
| Bank fixed deposits | Quarterly (for cumulative FDs) |
| Savings accounts | Interest calculated daily, credited quarterly or half-yearly |
| PPF, Sukanya Samriddhi | Yearly |
| NSC | Yearly, paid at maturity |
| Credit card dues | Monthly, and it works against you |
Why the effective rate matters
Two deposits both quoting 8% are not equal if one compounds quarterly and the other yearly. The effective annual rate converts both to the same basis so you can compare them honestly. The same logic explains why a credit card's 3.5% a month is far worse than 42% a year: compounded monthly it is closer to 51%.
For regular monthly investing into market-linked funds, the SIP calculator uses the convention Indian fund houses use. For bank deposits specifically, the FD and RD calculators follow bank rules.
The same money, three horizons
Compounding rewards patience more than a higher rate. At 8%, money roughly doubles in 9 years, quadruples in 18 and grows eightfold in 27. Starting ten years earlier often matters more than finding an extra 1–2% of return. Try the slider for time period above and watch how the interest portion of the result overtakes the money you put in.
Frequently asked questions
Does more frequent compounding always give more money?
Yes, at the same quoted rate. The gain from yearly to quarterly is noticeable; from monthly to daily it is tiny.
How are monthly additions compounded here?
They grow at the effective annual rate, converted to a monthly rate, and are added at the end of each month.
Is compound interest taxable?
Interest from deposits is taxed each year at your slab rate, even if it is only paid at maturity. That reduces your real compounding.