How does compounding frequency affect returns?

More frequent compounding gives higher returns, but the difference diminishes as frequency increases. For ₹1,00,000 at 8% for 10 years: Annual compounding gives ₹2,15,892; Quarterly gives ₹2,20,804; Monthly gives ₹2,21,964; Daily gives ₹2,22,535. The jump from annual to quarterly is significant; from monthly to daily is small. Most Indian FDs compound quarterly.

What is Effective Annual Rate (EAR)?

EAR (also called Effective Annual Yield or Annual Equivalent Rate) is the actual annual return after accounting for compounding. Formula: EAR = (1 + r/n)^n − 1. An 8% rate compounded quarterly has EAR = (1 + 0.08/4)^4 − 1 = 8.24%. Monthly compounding gives 8.30%. EAR is what banks call the ‘Annualised Yield’ on their FD offers — always compare EAR when comparing fixed deposits across banks.

What is the difference between compound interest and simple interest?

Simple interest: I = P × r × t (interest only on principal, same amount each year). Compound interest: A = P × (1 + r/n)^(n×t) (interest on principal + accumulated interest, grows exponentially). For ₹1,00,000 at 8% for 10 years: Simple interest = ₹80,000 interest, maturity ₹1,80,000. Compound interest (quarterly) = ₹1,20,804 interest, maturity ₹2,20,804. The difference grows dramatically over longer periods.

How does Indian FD compounding work?

Most Indian bank Fixed Deposits compound quarterly (4 times per year). The interest is credited to the FD quarterly but is reinvested (not paid out), so the next quarter’s interest is calculated on a higher base. When banks advertise an FD at ‘9% per annum’, the maturity yield (EAR) is actually slightly higher — approximately 9.31% with quarterly compounding. Small Finance Banks and NBFCs sometimes offer monthly or even daily compounding, which further increases the effective yield.

What is the Rule of 72?

The Rule of 72 is a mental math shortcut: divide 72 by the annual interest rate to estimate how many years it takes to double your investment. At 8% per year: 72 ÷ 8 = 9 years to double. At 12%: 72 ÷ 12 = 6 years. At 6%: 72 ÷ 6 = 12 years. The rule works for compound interest and is a quick way to compare investment options without a calculator.

Compound Interest Calculator

See how your money grows with the power of compounding. Works for FD, savings accounts, stocks or any investment. Choose compounding frequency and get maturity amount, interest earned and effective annual rate instantly.

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A = P × (1 + r/n)^(n×t) | Rule of 72: Years to double = 72 ÷ rate% | CI = A − P

How Compound Interest Works

Compound interest is the mechanism by which interest earns interest. Each compounding period, the interest earned is added to the principal, and the next period's interest is calculated on this new, higher balance. Over long periods, this creates exponential growth — the "snowball effect" that makes it the most powerful force in personal finance.

A = P × (1 + r/n)^(n×t)
EAR = (1 + r/n)^n − 1
Where: P = Principal · r = Annual rate (decimal) · n = Compounding frequency/year · t = Time (years)

Most Indian bank Fixed Deposits use quarterly compounding (n=4). A ₹1,00,000 FD at 8% for 5 years: A = 1,00,000 × (1.02)²⁰ = ₹1,48,594. The Rule of 72 gives a quick estimate — divide 72 by the interest rate to find years to double your money: at 8%, your money doubles in approximately 9 years.

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Frequently Asked Questions — Compound Interest

Compound interest is interest calculated on both the initial principal and the accumulated interest. Unlike simple interest (which only earns on the principal), compound interest causes your investment to grow exponentially — often called 'interest on interest'. The longer you leave money invested, the more powerful the effect, because each period's interest itself earns interest in the next period.

A = P × (1 + r/n)^(n×t), where: A = maturity amount, P = principal, r = annual interest rate as a decimal (e.g. 8% = 0.08), n = compounding frequency per year (1=annually, 4=quarterly, 12=monthly, 365=daily), t = time in years. Example: ₹1,00,000 at 8% for 5 years compounded quarterly: A = 1,00,000 × (1 + 0.08/4)^(4×5) = 1,00,000 × (1.02)²⁰ = ₹1,48,594.

More frequent compounding gives higher returns. For ₹1,00,000 at 8% for 10 years: Annual compounding → ₹2,15,892; Quarterly → ₹2,20,804; Monthly → ₹2,21,964; Daily → ₹2,22,535. The jump from annual to quarterly is significant; from monthly to daily is small. Most Indian FDs compound quarterly, which is why the advertised rate and the effective annual yield differ slightly.

EAR is the actual annual return after accounting for compounding frequency. Formula: EAR = (1 + r/n)^n − 1. An 8% rate compounded quarterly has EAR = (1.02)⁴ − 1 = 8.24%. Monthly gives 8.30%. Banks often show EAR as "Annualised Yield" on FD offer cards — always compare EAR across banks rather than the nominal rate when evaluating fixed deposits.

Simple interest: I = P × r × t (same interest amount every year, only on principal). Compound interest: A = P × (1 + r/n)^(n×t) (interest grows each period). For ₹1,00,000 at 8% over 10 years: Simple interest = ₹80,000 interest, maturity ₹1,80,000. Compound interest (quarterly) = ₹1,20,804 interest, maturity ₹2,20,804. The difference grows dramatically over longer periods — after 20 years the gap is even more stark.

Most Indian bank Fixed Deposits compound quarterly (4 times per year). Interest is credited quarterly and reinvested, so each subsequent quarter earns interest on a slightly higher base. When a bank advertises "9% per annum", the actual maturity yield (EAR) is approximately 9.31% with quarterly compounding. Small Finance Banks and NBFCs sometimes offer monthly or daily compounding, further increasing the effective yield.

The Rule of 72 is a mental math shortcut: divide 72 by the annual interest rate to estimate how many years it takes to double your investment with compound interest. At 8%: 72 ÷ 8 = 9 years. At 12%: 72 ÷ 12 = 6 years. At 6%: 72 ÷ 6 = 12 years. It also works in reverse — if you want to double in 6 years, you need approximately 12% annual returns. This is one of the most useful mental shortcuts in personal finance.

⚠️ Disclaimer: This calculator is for educational and informational purposes only. Results are estimates based on the inputs provided and standard financial formulas. Actual returns, tax liability, or costs may vary based on market conditions, applicable laws, and individual circumstances. This does not constitute financial, investment, or tax advice. Please consult a qualified financial advisor or Chartered Accountant before making financial decisions.