See how interest-on-interest grows your money — choose the compounding frequency and watch the year-wise build-up.
How compound interest works
Compound interest pays interest on your principal and on the interest that has already been added. Each period's interest joins the balance and earns interest in turn, so the money grows faster and faster:
A = P × (1 + r ÷ n)n × t
where P is the principal, r the annual rate (decimal), n how many times it compounds per year (1 annual, 2 half-yearly, 4 quarterly, 12 monthly) and t the years. The interest earned is A − P.
Worked example: ₹1,00,000 at 8% for 10 years (quarterly)
Compounded quarterly, ₹1,00,000 at 8% for 10 years matures at ₹2,20,804 (₹2.21 lakh) — that is ₹1,20,804 of interest. Under plain simple interest you would earn only ₹80,000, so compounding adds about ₹40,804. The year-wise table above shows the interest column rising every year — that is the "interest on interest" at work.
Why frequency matters (a little)
More frequent compounding earns marginally more, because interest is reinvested sooner. On the same ₹1,00,000 at 8% over 10 years:
| Compounding | Maturity |
|---|
| Annually (n=1) | ₹2,15,892 |
| Half-yearly (n=2) | ₹2,19,112 |
| Quarterly (n=4) | ₹2,20,804 |
| Monthly (n=12) | ₹2,21,964 |
The gain from annual to quarterly is real; the gain from quarterly to monthly is tiny. Banks compound FDs quarterly for exactly this reason — see our FD calculator.
The real lesson: time beats rate
Because growth is exponential, the number of years invested usually matters more than squeezing out an extra percent of rate. The quick "rule of 72" estimates the doubling time as 72 ÷ rate. Starting early is the cheapest way to a large corpus — which is why a long-running SIP or PPF compounds into far more than the contributions alone. For annualised investment returns, use the CAGR calculator.
Frequently Asked Questions
How is compound interest calculated?
Compound interest pays interest on the principal and on previously earned interest. The maturity amount is A = P × (1 + r/n)n×t, where P is the principal, r the annual rate (decimal), n the number of times it compounds per year and t the years. The interest is then A − P.
How does compounding frequency change the result?
More frequent compounding earns slightly more, because interest starts earning interest sooner. On ₹1,00,000 at 8% for 10 years, annual compounding matures at ₹2,15,892 while monthly compounding reaches ₹2,21,964. The jump shrinks at higher frequencies — the gap between quarterly and monthly is small.
What is the power of compounding?
Compounding turns time into your biggest asset: the longer money stays invested, the larger the share of growth that comes from interest-on-interest rather than your own contributions. Over ₹1,00,000 at 8% for 10 years (quarterly), you earn ₹1,20,804 — about ₹40,804 more than plain simple interest. Over 20–30 years the difference becomes enormous.
Simple vs compound interest — which is better for me?
If you are
investing or saving, you want compound interest — it works in your favour. If you are
borrowing, simple interest is cheaper. Most savings products (FDs, PPF, mutual funds) compound; some short-term loans use simple interest. Compare on our
simple interest calculator.
What is the rule of 72?
A quick mental shortcut: divide 72 by the annual compound rate to estimate the years for money to double. At 8%, that is 72 ÷ 8 = about 9 years. It is approximate but handy. For a precise doubling period at a given rate, see our
KVP doubling calculator.
Is compound interest income taxable?
Yes. Interest credited to a deposit is taxable in the year it accrues, at your slab rate, even if you don't withdraw it. Tax-free exceptions like PPF are notified schemes, not the norm. TDS applies on bank interest above ₹50,000 a year (₹1,00,000 for seniors, FY 2025-26). Estimate the tax with our
income tax calculator.
Estimates are for information and education only — not financial, tax or investment advice. Verify current rates and rules with official sources.