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Simple & Compound Interest Calculator

Compare Simple vs Compound Interest

Investment Details

Compare how simple interest and compound interest grow your investment differently.

₹
% p.a.
Years

Results Comparison

Simple Interest

₹0
Interest Earned
Total: ₹0

Compound Interest

₹0
Interest Earned
Total: ₹0
Benefit of Compounding
₹0
Extra earnings with compound interest
Principal Amount
₹1,00,000
Interest Rate
10% p.a.
Time Period
5 years
Compounding
Monthly

Simple Interest Breakdown

Principal Amount₹1,00,000
Simple Interest (P × R × T / 100)₹0
Total Amount₹0

Compound Interest Breakdown

Principal Amount₹1,00,000
Compound Interest (A = P(1 + r/n)^(nt) - P)₹0
Total Amount₹0

Key Difference:
Simple Interest: Calculated only on principal amount
Compound Interest: Calculated on principal + accumulated interest (interest on interest)

Simple vs Compound Interest Calculator – See the Power of Compounding (₹8.14L vs ₹6.44L = ₹1.7L More!)

The Simple vs Compound Interest Calculator compares how simple interest (SI) and compound interest (CI) grow your investment—showing the dramatic difference between "interest on principal only" vs "interest on interest"! This calculator answers: How much more do I earn with compound interest? (₹10L @ 10% for 20 years: CI ₹67.27L vs SI ₹30L = ₹37.27L MORE = 124% extra!), Should I invest in bank FD (monthly compounding) or fixed returns scheme (annual SI)? (₹10L @ 8%: FD ₹49.27L vs SI ₹40L = ₹9.27L more in 20 years!), Why do financial advisors say "start early"? (₹1L invested age 25 → ₹21.7L age 65 @ 8% CI, age 35 → ₹10L age 65 = ₹11.7L LOST from 10-year delay = compounding time matters!), How does compounding frequency affect returns? (₹10L @ 12%: Daily ₹181.9L, Monthly ₹181.7L, Quarterly ₹179.6L, Yearly ₹176.2L = daily 3.2% better!).

This calculator is ideal for investors comparing FD vs bonds (FD compounds quarterly, bonds pay simple interest!), financial planners showing clients compounding power (₹5L SIP @ 12% 30 years = ₹1.76Cr CI vs ₹21L SI = 8.4× difference!), students learning time value of money (Einstein: "Compound interest is 8th wonder of world!"), retirement savers (₹50k/month × 25 years @ 10% = ₹6.5Cr CI corpus vs ₹1.5Cr simple = 4.3× more!), and loan borrowers understanding debt costs (₹20L home loan @ 8% 20 years: CI basis = ₹46L interest, SI basis = ₹32L = ₹14L difference = why loans expensive!). Key concepts: (1) Simple Interest (SI): Calculated ONLY on original principal = Principal × Rate × Time ÷ 100 (₹1L @ 10% 5 years = ₹1L × 10 × 5 ÷ 100 = ₹50k interest, total ₹1.5L!). Linear growth (₹10k Year 1, ₹10k Year 2, ₹10k Year 3... constant!). Used in: Personal loans (some), promissory notes, short-term deposits (< 6 months!). (2) Compound Interest (CI): Calculated on principal + accumulated interest = Principal × (1 + Rate/Frequency)^(Frequency × Time) - Principal (₹1L @ 10% annually 5 years = ₹1L × (1.10)^5 = ₹1.61L, interest ₹61k vs SI ₹50k = ₹11k MORE!). Exponential growth (Year 1: ₹10k, Year 2: ₹11k on ₹1.1L, Year 3: ₹12.1k on ₹1.21L... accelerating!). Used in: Bank FDs, PPF, bonds, mutual funds, savings accounts, credit cards (scary!). (3) Compounding Frequency Impact: More frequent = MORE returns! Yearly (n=1), Half-yearly (n=2), Quarterly (n=4), Monthly (n=12), Daily (n=365), Continuous (n=∞!). ₹1L @ 12%: Yearly ₹1.76L, Quarterly ₹1.8L, Monthly ₹1.82L, Daily ₹1.83L (daily 3.2% better than yearly over 5 years!).

Unlike fixed SI schemes (interest paid out annually = no reinvestment!), CI compounds interest automatically (interest stays invested, earns MORE interest = snowball effect!). Unlike one-time investments, this calculator shows impact on SINGLE principal (for monthly SIP with CI, use SIP calculator!). Calculator uses exact formulas: SI = P × R × T / 100 (₹10L × 10 × 5 / 100 = ₹5L interest!). CI = P × (1 + R/n)^(n×T) - P (₹10L × (1 + 0.10/12)^(12×5) - ₹10L = ₹6.45L interest = ₹1.45L MORE than SI!). Shows: Simple interest amount (₹50k linear!), simple total (₹1.5L principal + interest!), compound interest amount (₹61k exponential!), compound total (₹1.61L bigger than SI!), benefit of compounding (₹11k extra earnings = 22% more interest just from compounding!). Compare frequencies: Yearly vs quarterly vs monthly vs daily (see how daily compounding adds 2-5% more returns long-term!). Use for: Investment decision (choose FD with quarterly CI over annual SI scheme = more returns!), retirement planning (₹25k/month 30 years @ 10% = ₹5.65Cr CI vs ₹90L principal = 6.3× growth, understand why "time in market beats timing"!), education corpus (₹5L now → ₹32.6L in 18 years @ 10% CI for child's college = compounding builds wealth!), debt awareness (credit card 3% monthly CI = 42.6% annual effective vs 36% SI = understand true loan cost!), FD comparison (Bank A 7% quarterly, Bank B 7.2% annual = A yields 7.19% effective, B yields 7.2% = B better despite same nominal rate, check compounding!).

Understanding SI vs CI Calculator Components

1

Principal Amount (₹1k - ₹1Cr)

Definition: Initial investment amount (one-time lump sum, not monthly SIP!)

How it works: Principal is the "seed money" that grows via SI or CI. SI: Interest calculated ONLY on this original ₹10L (every year ₹1L interest @ 10%, never changes!). CI: Interest calculated on growing balance (Year 1: ₹1L interest on ₹10L principal, Year 2: ₹1.1L interest on ₹11L balance = principal + Year 1 interest, Year 3: ₹1.21L on ₹12.1L = snowball!). Larger principal = larger absolute difference (₹1L @ 10% 10 years: CI ₹1.59L vs SI ₹1L = ₹59k more! ₹10L: CI ₹15.94L vs SI ₹10L = ₹5.94L more = 10× principal = 10× absolute gain!). But percentage gain same (59% extra regardless of principal size!). Calculator default: ₹1L (₹10L is common FD, ₹50L is large deposit, ₹1Cr is HNI investment!). Use for: Lump sum FD deposit (₹5L bonus invested!), inheritance investment (₹20L from grandparent!), retirement corpus (₹50L NPS withdrawal reinvested!), emergency fund growth comparison (₹3L in savings account!). Pro tip: Even small principals show compounding power (₹10k @ 10% CI 30 years = ₹1.75L vs SI ₹40k = ₹1.35L more = 13.5× original, proves "every rupee counts"!). Not for: Monthly SIPs (use SIP calculator for recurring investments!), salary (use income calculator!), loans (use EMI calculator for debt!).

Example: Principal ₹10,00,000, Rate 10% p.a., Time 10 years, Compounding monthly. SI: ₹10L × 10 × 10 / 100 = ₹10L interest, total ₹20L (doubled in 10 years, linear!). CI: ₹10L × (1 + 0.10/12)^(12×10) = ₹27.07L, interest ₹17.07L (vs SI ₹10L = ₹7.07L MORE = 70.7% extra interest!). Breakdown: Year 1 CI interest ≈ ₹1.05L (vs SI ₹1L = ₹5k more!). Year 5 CI interest ≈ ₹1.35L (vs SI ₹1L = ₹35k more!). Year 10 CI interest ≈ ₹2.14L (vs SI ₹1L = ₹1.14L MORE = 114% more in final year alone = compounding accelerates!). Cumulative: SI steady ₹1L/year × 10 = ₹10L total. CI accelerating (₹1.05L + ₹1.16L + ₹1.27L + ₹1.4L + ₹1.54L + ₹1.7L + ₹1.87L + ₹2.06L + ₹2.27L + ₹2.5L ≈ ₹17.07L total!).

Pro tip: Use realistic principal (actual FD amount, not theoretical!), test multiple scenarios (₹5L vs ₹10L vs ₹20L to see scaling!), remember: This is ONE-TIME investment (for monthly investments use SIP/RD calculators!), focus on % difference (70.7% extra from CI vs SI = powerful regardless of principal size!). For retirement: ₹50L lump sum now vs ₹25k/month SIP = different calculators (lump sum here, SIP elsewhere!).

2

Interest Rate (1% - 30% p.a.)

Definition: Annual percentage rate (APR) at which investment grows (or loan compounds!)

How it works: Higher rate = EXPONENTIALLY bigger CI advantage (not linear!). At 5% (safe FD): ₹10L 10 years CI ₹16.47L vs SI ₹15L = ₹1.47L extra (14.7% more!). At 10% (balanced fund): CI ₹27.07L vs SI ₹20L = ₹7.07L extra (70.7% more = 4.8× advantage vs 5%!). At 15% (equity): CI ₹43.45L vs SI ₹25L = ₹18.45L extra (184.5% more = 12.5× advantage vs 5%!). Formula: SI grows linearly with rate (double rate = double interest: 5% = ₹5L, 10% = ₹10L, 15% = ₹15L on ₹10L 10 years). CI grows exponentially with rate (double rate = MORE than double interest: 5% = ₹6.47L, 10% = ₹17.07L = 2.64× not 2×, 15% = ₹28.45L = 4.4× not 3×!). Time multiplier: Higher rate + longer time = MASSIVE CI advantage (₹10L @ 15% 20 years: CI ₹153.86L vs SI ₹40L = ₹113.86L extra = 285% more interest = 3.85× original!).

Example: ₹10L principal, 10 years, monthly compounding. At 6% (savings): SI ₹6L, CI ₹8.19L (₹2.19L extra = 36.5% more!). At 8% (safe FD): SI ₹8L, CI ₹12.19L (₹4.19L extra = 52.4% more!). At 10% (balanced MF): SI ₹10L, CI ₹17.07L (₹7.07L extra = 70.7% more!). At 12% (aggressive equity): SI ₹12L, CI ₹23.00L (₹11L extra = 91.7% more!). At 15% (high-risk): SI ₹15L, CI ₹34.71L (₹19.71L extra = 131.4% more!). Pattern: Every 2% rate increase = ~15-20% more CI advantage (not linear scaling!). Takeaway: Higher rates AMPLIFY compounding benefit (₹10L @ 15% 20 years = ₹163.66L CI vs ₹40L SI = 4.1× vs 2.7× @ 10% = higher rate = higher multiplier!). Risk: Higher rates = higher volatility (15% guaranteed rare, 15% average equity possible with -30% to +50% annual swings!).

Pro tip: Use realistic rates: Bank FD 6-7%, PPF 7.1%, equity MF 12-15% (historical average, not guaranteed!), debt funds 7-9%, gold bonds 2.5% + gold price appreciation. Conservative planning: Use lower rate (8% vs 12% optimistic = safer retirement projections!). Loan awareness: Credit cards 3% monthly = 42.6% annual effective CI (vs 36% SI = ₹6.6% more cost due to monthly compounding = why CC debt kills!). Compare: Same rate, different compounding = effective rate differs (7% quarterly = 7.19% effective, 7% daily = 7.25% effective!).

3

Time Period (1 - 30 Years)

Definition: Investment duration (holding period for FD/MF, or loan tenure for debt!)

How it works: Time is THE MOST powerful factor in compounding (Einstein's "8th wonder" = time × rate!). Short-term (1-3 years): SI vs CI difference small (₹10L @ 10% 3 years: SI ₹3L, CI ₹3.48L = ₹48k extra = 16% more = noticeable but not game-changing!). Mid-term (5-10 years): Difference grows (₹10L @ 10% 10 years: SI ₹10L, CI ₹17.07L = ₹7.07L extra = 70.7% more = significant!). Long-term (15-30 years): EXPLOSIVE difference (₹10L @ 10% 30 years: SI ₹30L, CI ₹192.29L = ₹162.29L extra = 541% more = 6.4× original principal from interest alone!). Rule of 72: Doubling time ≈ 72 / rate (@ 10% = 7.2 years for CI to double principal, vs 10 years for SI = CI 39% faster!). Non-linear: First 10 years ₹7L advantage, next 10 years ₹38L advantage, next 10 years ₹117L advantage (accelerating returns = "interest on interest on interest"!). Start-early advantage: ₹10L @ 10% age 25 → ₹192.29L age 55 (30 years!). ₹10L age 35 → ₹67.27L age 55 (20 years). Difference: ₹125.02L LOST from 10-year delay = ₹12.5L per year opportunity cost = why "start early, invest small" beats "start late, invest large"!

Example: ₹10L @ 10% monthly compounding. 5 years: SI ₹5L, CI ₹6.45L (₹1.45L extra = 29% more!). 10 years: SI ₹10L, CI ₹17.07L (₹7.07L extra = 70.7% more = 2.4× vs 5 years!). 15 years: SI ₹15L, CI ₹34.71L (₹19.71L extra = 131.4% more = 2.8× vs 10 years!). 20 years: SI ₹20L, CI ₹67.27L (₹47.27L extra = 236.4% more = 2.4× vs 15 years!). 30 years: SI ₹30L, CI ₹192.29L (₹162.29L extra = 541% more = 3.4× vs 20 years!). Acceleration: Extra CI advantage grows EXPONENTIALLY (Year 1-10 = ₹7L, Year 11-20 = ₹40L = 5.7× faster, Year 21-30 = ₹115L = 2.9× faster again!). Formula: CI = P × (1 + r)^t grows as t increases (SI = P × r × t grows linearly). Slope: SI constant ₹1L/year, CI increasing (₹1.05L Year 1 → ₹2.5L Year 10 → ₹8.7L Year 30 = 8.3× steeper in final year!).

Pro tip: Model different tenures (5, 10, 15, 20, 30 years to see compounding accelerate!), retirement planning: 25-year horizon minimum (25-year-old has 40 years to 65 = ₹50k/month × 40 years @ 10% = ₹6.5Cr corpus!). Goal-based: Child education 15 years (₹5L now → ₹20.9L @ 10% CI = covers ₹25L engineering!), marriage 20 years (₹10L now → ₹67.27L = covers ₹50L wedding + house down payment!). Avoid withdrawal: Every year you take out interest = switches from CI to SI (₹10L @ 10%: Take ₹1L annually = ₹30L after 20 years vs keep invested ₹67.27L = ₹37.27L LOST = why dividends should reinvest, not withdraw!).

4

Compounding Frequency (Yearly, Quarterly, Monthly, Daily)

Definition: How often interest is added to principal and starts earning its own interest (n in formula!)

How it works: More frequent compounding = MORE returns (but diminishing returns beyond daily!). Yearly (n=1): Interest added once/year (Dec 31, or maturity date FD!). Half-yearly (n=2): Interest added twice/year (June 30, Dec 31 for bonds!). Quarterly (n=4): Interest added 4 times/year (most bank FDs!). Monthly (n=12): Interest added every month (online FDs, PPF!). Daily (n=365): Interest added daily (savings accounts, some money market funds!). Continuous (n=∞): Theoretical maximum (e^(rt) formula, academic exercise!). Impact: ₹10L @ 10% 10 years. Yearly ₹25.94L (₹15.94L interest!). Quarterly ₹26.85L (₹16.85L interest = ₹91k more = 5.7% better!). Monthly ₹27.07L (₹17.07L interest = ₹22k more than quarterly = 1.3% better = diminishing!). Daily ₹27.18L (₹17.18L interest = ₹11k more than monthly = 0.6% better = marginal!). Law: Doubling frequency adds ~0.5-2% returns (yearly → half-yearly = 1.5%, half-yearly → quarterly = 0.8%, quarterly → monthly = 1.3%, monthly → daily = 0.6% = diminishing!). Long-term amplification: ₹10L @ 10% 30 years. Yearly ₹174.49L. Quarterly ₹191.23L (₹16.74L more = 9.6% better over 30 years!). Monthly ₹192.29L (₹1.06L more than quarterly = 0.6% better!). Daily ₹193.15L (₹860k more than monthly = 0.4% better = minimal!).

Example: ₹10L @ 12% 20 years (aggressive equity MF assumption). Yearly (n=1): ₹10L × (1.12)^20 = ₹96.46L (₹86.46L interest!). Half-yearly (n=2): ₹10L × (1.06)^40 = ₹102.86L (₹92.86L interest = ₹6.4L more = 7.4% better!). Quarterly (n=4): ₹10L × (1.03)^80 = ₹106.41L (₹96.41L interest = ₹3.55L more = 3.7% better than half-yearly!). Monthly (n=12): ₹10L × (1.01)^240 = ₹108.93L (₹98.93L interest = ₹2.52L more = 2.6% better!). Daily (n=365): ₹10L × (1 + 0.12/365)^7300 = ₹110.17L (₹100.17L interest = ₹1.24L more = 1.2% better = marginal!). Total span: Daily vs yearly = ₹110.17L vs ₹96.46L = ₹13.71L difference = 14.2% more returns just from compounding FREQUENCY (not rate, not time, just frequency!).

Pro tip: FD comparison: Bank A 7% quarterly, Bank B 7.1% yearly. A effective: (1 + 0.07/4)^4 - 1 = 7.19% p.a. B effective: 7.1% p.a. A BETTER despite lower nominal rate (7% > 7.1% effective due to quarterly compounding!). Online FDs: Often monthly compounding (vs branch quarterly) = check both rate AND frequency (6.9% monthly may beat 7% quarterly!). PPF: Compounds MONTHLY but interest added yearly (interest calculated every month, credited March 31 = effectively monthly for deposits before 5th!). Credit cards: DAILY compounding (₹1L @ 3%/month daily = effective 42.58% p.a. vs 36% simple = ₹6.58% extra cost = why CC debt expensive!). Savings accounts: Daily compounding, monthly credit (interest calculated daily, paid monthly = best of both!). Prioritize: Rate > Time > Frequency (10% yearly > 9% daily, 20 years > 10 years even at lower rate, frequency matters LEAST but still 3-10% boost!).

How to Use the SI vs CI Calculator

  1. Enter Principal Amount (₹1k - ₹1Cr):

    Input one-time investment amount (lump sum FD deposit ₹5L, bonus ₹2L, inheritance ₹10L!). This is initial seed money that will grow via SI or CI. Use realistic amounts (actual FD, not hypothetical!).

  2. Set Interest Rate (1% - 30% p.a.):

    Choose annual percentage rate: Bank FD 6-7%, PPF 7.1%, equity MF 12-15%, debt funds 7-9%, credit card 36-42%! Higher rate = EXPONENTIALLY bigger CI advantage (10% CI ₹17.07L vs 5% CI ₹6.47L on ₹10L 10 years = 2.64× more, not 2×!).

  3. Select Time Period (1 - 30 Years):

    Investment duration: Short-term 1-3 years (minor difference!), mid-term 5-10 years (significant!), long-term 15-30 years (EXPLOSIVE difference, ₹162L extra CI vs SI on ₹10L @ 10% 30 years!). Time is MOST powerful compounding factor!

  4. Choose Compounding Frequency:

    How often interest compounds: Yearly (basic), half-yearly (bonds), quarterly (bank FDs), monthly (online FDs, PPF), daily (savings accounts). More frequent = 3-10% more returns (₹10L @ 10% 10 years: Daily ₹27.18L vs yearly ₹25.94L = ₹1.24L more!).

  5. Compare Results – SI vs CI Difference:

    Analyze: (1) Simple interest—linear, constant ₹1L/year @ 10% (₹10L 10 years = ₹10L total SI). (2) Compound interest—exponential, accelerating (Year 1: ₹1.05L, Year 10: ₹2.5L = ₹17.07L total CI!). (3) Benefit of compounding—₹7.07L extra earnings (70.7% more interest = power of CI!). (4) Frequency impact—test yearly vs monthly vs daily (see 3-10% boost from more frequent compounding!). Use to: Decide FD bank (higher rate OR more frequent compounding?), understand retirement corpus (₹10L @ 10% CI 30 years = ₹192.29L vs SI ₹40L = 4.8× more!), visualize "start early" advantage (10-year delay = ₹125L LOST on ₹10L @ 10%!), debt awareness (credit card daily CI = 42.6% effective vs 36% nominal = 18% MORE expensive!).

Practical Example: ₹10L FD Investment – SI vs CI Over 10 Years @ 10% Monthly

Scenario: Amit (age 30, salaried ₹12L/year) receives ₹10L bonus. Option A: Fixed return scheme (10% SI paid annually). Option B: Bank FD (10% CI monthly compounding). Which earns more after 10 years?

Option A: Simple Interest (SI) – Fixed Return Scheme

  • Principal: ₹10,00,000
  • Interest Rate: 10% p.a. simple (interest paid annually, NOT reinvested!)
  • Time Period: 10 years
  • Formula: SI = P × R × T / 100 = ₹10L × 10 × 10 / 100 = ₹10,00,000 interest
  • Yearly Breakdown: Year 1: ₹1L interest (₹10L principal unchanged!). Year 2: ₹1L interest (still ₹10L principal!). Year 3-10: ₹1L each year (constant, linear growth!). Total interest: ₹1L × 10 years = ₹10,00,000
  • Maturity Amount: ₹10L + ₹10L = ₹20,00,000 (doubled in 10 years!)
  • Effective Annual Return: 10% (nominal = effective for SI, no compounding!)

Option B: Compound Interest (CI) – Bank FD Monthly Compounding

  • Principal: ₹10,00,000
  • Interest Rate: 10% p.a. compounded monthly (interest added every month, starts earning interest!)
  • Time Period: 10 years (120 months!)
  • Compounding Frequency: Monthly (n = 12)
  • Formula: CI = P × (1 + R/n)^(n×T) - P = ₹10L × (1 + 0.10/12)^(12×10) - ₹10L = ₹10L × (1.00833)^120 - ₹10L = ₹27,07,041 - ₹10L = ₹17,07,041 interest
  • Yearly Breakdown: Year 1: ₹1,04,713 interest (₹10L grows to ₹11.05L!). Year 2: ₹1,15,510 interest (₹11.05L grows to ₹12.20L = interest earns interest!). Year 5: ₹1,53,947 interest (balance ₹16.45L, snowball effect!). Year 10: ₹2,46,222 interest (balance ₹27.07L, final year alone earns 2.46× Year 1 = compounding accelerates!). Total interest: ₹17,07,041
  • Maturity Amount: ₹10L + ₹17.07L = ₹27,07,041 (2.7× original!)
  • Effective Annual Return: 10.47% (monthly compounding boosts nominal 10% to effective 10.47%!)

Comparison Summary:

MetricSI (Option A)CI (Option B)Difference
Principal₹10,00,000₹10,00,000Same
Interest Rate10% p.a. SI10% p.a. CI monthlySame nominal
Time Period10 years10 yearsSame
Interest Earned₹10,00,000₹17,07,041 ✅+₹7,07,041 (70.7% MORE!)
Maturity Amount₹20,00,000₹27,07,041 ✅+₹7,07,041 (35% MORE!)
Effective Return10% p.a.10.47% p.a. ✅+0.47% boost
Year 1 Interest₹1,00,000₹1,04,713+₹4,713
Year 10 Interest₹1,00,000 (same!)₹2,46,222 ✅+₹1,46,222 (146% MORE!)

Amit's Decision: Choose Option B (CI Bank FD)!

Rationale:

  • ₹7.07L More Earnings: CI earns ₹17.07L vs SI ₹10L = 70.7% more interest (₹7.07L = enough for ₹15L car down payment OR 2-year emergency fund OR daughter's school fees!).
  • Accelerating Growth: SI constant ₹1L/year (boring!), CI accelerating ₹1.05L Year 1 → ₹2.46L Year 10 (exciting, snowball!). Final year alone: CI earns ₹2.46L vs SI ₹1L = 146% more in Year 10!
  • Higher Effective Return: 10.47% CI effective vs 10% SI = monthly compounding adds 0.47% p.a. (₹47k extra on ₹10L 10 years = pays annual gym membership 10 years!).
  • Compounding Frequency Matters: If Option B were yearly CI (not monthly), interest ₹15.94L vs monthly ₹17.07L = ₹1.13L LESS (monthly 7.1% better!). Lesson: Check both rate AND frequency when comparing FDs!
  • Reinvestment Automatic: CI: Interest automatically reinvested monthly (no action needed!). SI: ₹1L/year paid out = must manually reinvest (or spend = temptation! Amit may use annual ₹1L SI for vacation = only ₹10L after 10 years, loses ₹17L opportunity!).
  • Tax Efficiency (Same): Both SI and CI interest taxable @ 30% slab (₹10L interest SI = ₹3L tax, ₹17.07L interest CI = ₹5.12L tax!). CI pays ₹2.12L MORE tax BUT nets ₹11.95L post-tax vs SI ₹7L = ₹4.95L MORE even after extra tax!

What If Amit Needs Liquidity? Option A SI: ₹1L annual payout = better cash flow (₹8.3k/month passive income!). Option B CI: No annual payout, locked 10 years = poor liquidity (but premature FD withdrawal possible with 1-2% penalty!). Trade-off: ₹1L/year liquidity vs ₹7.07L extra earnings. Verdict: If no immediate need, choose CI (₹7L > liquidity!). If need monthly income, choose SI OR invest CI FD + take personal loan against FD (7-8% loan cost < 10% CI earning = net positive!).

Action Plan: Amit chooses Bank FD (10% monthly CI), deposits ₹10L, sets 10-year maturity, avoids premature withdrawal (lock-in mindset!), reinvests maturity ₹27.07L in equity MF @ 12% (₹27.07L @ 12% CI 15 years = ₹1.48Cr for age 55 retirement!), uses calculator annually to track growth (motivates savings discipline!). Result: ₹10L bonus → ₹27.07L in 10 years (Age 40) → ₹1.48Cr by 55 (retirement secured from single ₹10L bonus at 30 = power of compounding + time!).

Why SI vs CI Calculator Matters

  • 1. Visualizes Exponential Growth vs Linear (₹162L Extra CI Over SI = 541% More!) Calculator shows DRAMATIC difference between linear SI (constant interest) vs exponential CI (accelerating interest = "interest on interest"!). Short-term (1-3 years): Difference small (₹10L @ 10%: 3-year SI ₹3L vs CI ₹3.48L = ₹48k more = 16%, noticeable!). Mid-term (5-10 years): Difference grows (10-year SI ₹10L vs CI ₹17.07L = ₹7.07L more = 70.7%, significant!). Long-term (15-30 years): EXPLOSIVE (30-year SI ₹30L vs CI ₹192.29L = ₹162.29L more = 541%, life-changing!). Why exponential? SI: ₹10L × 10% × 30 = ₹30L (linear: principal × rate × time). CI: ₹10L × (1.10)^30 = ₹174.49L yearly (exponential: principal × (1+rate)^time). Monthly CI ₹192.29L even better (frequency boost!). Rule of 72: Doubling time = 72 / rate. @ 10%: 72/10 = 7.2 years CI to double (₹10L → ₹20L in 7.2 years!). SI: 10 years to double (₹10L + ₹1L×10 = ₹20L). CI 39% faster (Year 7.2 vs Year 10!). Multiple doublings: 30 years @ 10% = 4.2 doublings CI (₹10L → ₹20L → ₹40L → ₹80L → ₹160L ≈ ₹174L!). SI: 3 doublings max (₹10L → ₹20L → ₹30L → ₹40L linear, NOT exponential!). Acceleration visible: Year 1 CI interest ₹1.05L (vs SI ₹1L = ₹5k more = 5%). Year 10 CI interest ₹2.46L (vs SI ₹1L = ₹1.46L more = 146%!). Year 20 CI interest ₹6.12L (vs SI ₹1L = ₹5.12L more = 512%!). Year 30 CI interest ₹15.17L (vs SI ₹1L = ₹14.17L more = 1417%!). Final year alone earns 15× original annual SI (compounding MASSIVELY accelerates!). Real-world impact: ₹10L invested age 25, retired age 65 (40 years @ 10%). SI: ₹10L + ₹40L = ₹50L (5× original). CI: ₹453.74L (45.4× original = 9× better than SI!). Difference: ₹403.74L EXTRA from CI (enough to fund retirement + leave inheritance!). Lesson: Time + compounding = wealth creation (Einstein's "8th wonder" proven!). Use calculator to: Show clients why "invest early" critical (₹10L age 25 vs 35 = ₹453L vs ₹174L age 65 = ₹279L lost from 10-year delay!), compare investment options (FD 7% CI vs bond 8% SI: FD ₹38.7L vs bond ₹40L in 20 years = bond BETTER despite CI!), motivate consistent investing (seeing ₹162L advantage = powerful behavior change!), debt awareness (₹1L credit card @ 3%/month CI = ₹42.6% effective vs 36% SI = ₹6.6% MORE expensive = avoid CC debt!)
  • 2. Compares Compounding Frequencies (Monthly 7% Better Than Yearly = ₹1.13L More!) Calculator reveals CRITICAL impact of compounding frequency (yearly vs quarterly vs monthly vs daily!). Same rate, different frequencies = different returns! ₹10L @ 10% 10 years: Yearly CI ₹25.94L (₹15.94L interest, n=1). Quarterly CI ₹26.85L (₹16.85L interest, n=4 = ₹91k MORE than yearly = 5.7% better!). Monthly CI ₹27.07L (₹17.07L interest, n=12 = ₹22k more than quarterly = 1.3% better!). Daily CI ₹27.18L (₹17.18L interest, n=365 = ₹11k more than monthly = 0.6% better!). Diminishing returns: Yearly → quarterly = 5.7% boost. Quarterly → monthly = 1.3% boost. Monthly → daily = 0.6% boost (negligible!). Prioritize: Monthly OR quarterly sufficient, daily = marginal (not worth hunting!). Formula: Effective rate = (1 + r/n)^n - 1. Yearly 10%: Effective 10% (no boost!). Quarterly 10%: (1 + 0.10/4)^4 - 1 = 10.38% effective. Monthly 10%: (1 + 0.10/12)^12 - 1 = 10.47% effective. Daily 10%: (1 + 0.10/365)^365 - 1 = 10.52% effective. Continuous 10%: e^0.10 - 1 = 10.52% (same as daily = theoretical max!). Long-term amplification: ₹10L @ 10% 30 years. Yearly ₹174.49L. Quarterly ₹191.23L (₹16.74L more = 9.6% better over 30 years!). Monthly ₹192.29L (₹1.06L more = 0.6% better!). Daily ₹193.15L (₹860k more = 0.4% better!). FD comparison trick: Bank A: 7% quarterly. Bank B: 7.1% yearly. A effective: 7.19% (BETTER!). B effective: 7.1%. Choose A despite lower nominal rate (frequency matters!). Online FDs: Often monthly (vs branch quarterly) = 6.9% monthly may beat 7% quarterly! Check calculator before deciding. PPF quirk: Compounds monthly BUT interest credited yearly (deposits before 5th of month count full month = effectively monthly for timing!). Credit card trap: Daily compounding (3%/month = 42.58% effective p.a. vs 36% simple = 18% more expensive due to daily CI!). Savings accounts: Daily compounding, monthly credit (best of both = interest calculated daily, paid monthly!). Recommendation: Prioritize monthly OR quarterly (yearly = suboptimal, daily = overkill!). FD laddering: Spread ₹10L across 4 FDs (₹2.5L each quarterly maturity = liquidity + quarterly compounding benefit vs single yearly!). Calculator use: Input same principal/rate/time, toggle frequency (yearly vs monthly), see ₹1.13L+ difference on ₹10L 10 years = motivates choosing right FD!, compare 2 FDs (Bank A 6.9% monthly vs Bank B 7% yearly = A 7.12% effective, B 7% = A wins!). Frequency hierarchy: Daily ≈ Monthly > Quarterly > Half-yearly > Yearly (monthly 90% of daily benefit, much easier to find!)
  • 3. Proves "Start Early" Advantage (10-Year Delay = ₹125L Lost on ₹10L @ 10%!) Calculator quantifies MASSIVE opportunity cost of delaying investments (time = most powerful wealth factor!). Scenario: ₹10L invested @ 10% CI monthly. Age 25 start, retire 65 (40 years): ₹10L → ₹498.92L (49.9× original = ₹488.92L interest!). Age 35 start, retire 65 (30 years): ₹10L → ₹192.29L (19.2× original = ₹182.29L interest!). 10-year delay cost: ₹498.92L - ₹192.29L = ₹306.63L LOST (3× original investment forfeited just from starting late!). Per-year cost: ₹306.63L / 10 years = ₹30.66L per year delay (more than 3× original principal per year = devastating!). Compounding timeline: Years 1-10 (Age 25-35): ₹10L → ₹27.07L (₹17.07L gained = 171% growth!). Years 11-20 (Age 35-45): ₹27.07L → ₹73.28L (₹46.21L gained = 2.7× first decade!). Years 21-30 (Age 45-55): ₹73.28L → ₹198.37L (₹125.09L gained = 2.7× second decade!). Years 31-40 (Age 55-65): ₹198.37L → ₹536.94L (₹338.57L gained = 2.7× third decade, 19.8× first decade!). Acceleration: Each decade gains 2.7× previous decade (exponential, not linear!). Missing first decade: Loses ₹17L direct + ALL future compounding on that ₹17L (₹17L @ 10% 30 years = ₹297L by age 65 = ₹280L opportunity cost!). Alternative view: ₹10L age 25 OR ₹50L age 35 (5× more!) = same ₹498.92L age 65. Delay requires 5× more capital to achieve same result (time > money!). Rule: Start with ₹1k today > wait for ₹10k tomorrow (₹1k @ 10% CI 40 years = ₹49.89k, ₹10k 30 years = ₹192.29k = 3.85× more despite 10× higher principal delayed!). Monthly SIP version: ₹10k/month age 25 (40 years @ 10%) = ₹6.36Cr. ₹10k/month age 35 (30 years) = ₹2.26Cr. Difference: ₹4.1Cr LOST (1.8× more corpus from 10-year early start!). ₹48L deposits age 25-35 → ₹4.1Cr extra by 65 = ₹85 return per ₹1 invested in first 10 years (best ROI period!). Child education: ₹5L invested at birth (0 years old) @ 10%: Age 18 (engineering): ₹28.07L. Age 25 (MBA + marriage): ₹67.27L. Age 21 (daughter SSY maturity): ₹38.96L. Start at birth vs age 10: Birth ₹28.07L, age 10 ₹13.78L = ₹14.29L LESS (50% lower just from 10-year delay!). Retirement urgency: 25 vs 30 vs 35 starting age. Age 25: 40 years = ₹498.92L (49.9× multiplier!). Age 30: 35 years = ₹310.91L (31.1× multiplier, 37% less!). Age 35: 30 years = ₹192.29L (19.2× multiplier, 61% less than 25!). Each 5-year delay = 30-40% less corpus (non-linear penalty!). Calculator use: Model 3 start ages (25, 30, 35), same investment ₹10L, see ₹306L vs ₹118L gap = visual proof "start now" beats "invest more later"!, motivate young investors (20s = golden decade, every ₹1 → ₹50 by 65!), show parents (₹5L at child's birth > ₹20L at 10 years old for same age 18 corpus!). Bottom line: Time in market > timing the market, perfect time to invest = TODAY (not tomorrow!), missing first decade costs 3-5× final corpus = irreplaceable!, compound interest rewards patience + early start = "slow and steady wins the race"!

Frequently Asked Questions

Why is the compound interest on my actual FD different from calculator results?

Calculator shows IDEAL compounding (monthly/quarterly), but actual FD may differ due to: (1) Interest crediting vs compounding timing, (2) TDS deductions, (3) Premature withdrawal penalties, (4) Compounding frequency mismatch! Here's complete reconciliation:

Common Causes of Discrepancy:

1. Compounding vs Crediting Mismatch (Interest Calculated ≠ Interest Credited!):

  • Example: ₹10L FD @ 7% "monthly compounding" for 1 year. Calculator: Monthly compounding = ₹10L × (1 + 0.07/12)^12 = ₹10,72,290 (₹72,290 interest!). Actual Bank: Interest compounded monthly BUT credited quarterly (March 31, June 30, Sep 30, Dec 31!). Effectively: 4 quarters at 1.75% each (7% / 4). ₹10L × (1.0175)^4 = ₹10,71,859 (₹71,859 interest = ₹431 LESS than calculator!). Why: "Monthly compounding" marketing term = interest CALCULATED monthly (rate/12) BUT CREDITED quarterly (only 4 additions to principal, not 12!). Impact: Monthly calc vs quarterly credit = 0.5-1% lower returns (₹431 on ₹10L = 0.6% less!).
  • Solution: Check FD certificate: "Compounded monthly, credited quarterly" = use quarterly (n=4) in calculator, NOT monthly (n=12!). Confirm with bank: When is interest added to principal? (Monthly = best, quarterly = common, annually = worst!). Online FDs: Usually true monthly crediting (interest added every month = matches calculator!). Branch FDs: Often quarterly crediting (despite "monthly compounding" claim = use n=4!).

2. TDS Deductions (10% Tax Deducted at Source = Reduces Compounding Base!):

  • Example: ₹10L FD @ 7% 5 years, quarterly compounding. Calculator: ₹10L × (1 + 0.07/4)^20 = ₹14,14,778 (₹4.14L interest!). Actual Bank: TDS 10% on interest > ₹40k/year (₹10L × 7% = ₹70k Year 1 interest > ₹40k threshold!). Year 1: Interest ₹71,859, TDS ₹7,186 deducted, NET ₹64,673 added to principal (vs calculator ₹71,859 = ₹7,186 LESS compounding!). Year 2: Principal ₹10.65L (vs calculator ₹10.72L!), interest ₹74,537, TDS ₹7,454, net ₹67,083 added. Cumulative: 5-year TDS ~₹42k deducted, reduces compounding base, final maturity ₹13.72L (vs calculator ₹14.14L = ₹42k less!).
  • Solution: Submit Form 15G/15H if income < taxable limit (no TDS deducted, full compounding!). Senior citizens: Form 15H if income < ₹3L (avoid TDS!). Claim TDS refund: If TDS deducted but tax liability ₹0 (file ITR, get refund!). But: Refund comes AFTER year-end, loses compounding time (₹7k TDS Year 1 = ₹7k × 1.07^4 = ₹9.18k by Year 5 = ₹2.18k opportunity cost!). Calculator adjustment: Reduce interest rate by ~1% (7% FD with TDS = input 6% in calculator for realistic estimate!).

3. Premature Withdrawal Penalties (Break FD Early = Lose 1-2% Interest + No Compounding on Lost Amount!):

  • Example: ₹10L FD @ 7% 5 years, break after 3 years. Calculator (5 years): ₹14.14L. Actual (3 years): Principal ₹10L × (1 + 0.07/4)^12 = ₹12.32L (₹2.32L interest earned!). Penalty: 1% rate cut (7% → 6% for 3 years). Recalculated: ₹10L × (1 + 0.06/4)^12 = ₹11.96L (₹1.96L interest, ₹36k LESS!). Plus: Lost Years 4-5 compounding (₹11.96L @ 7% 2 years = ₹13.77L potential, actual ₹11.96L = ₹1.81L opportunity cost!). Total cost: ₹36k penalty + ₹1.81L lost compounding = ₹2.17L vs calculator ₹4.14L = 52% LESS!
  • Solution: Avoid premature withdrawal (set FD tenure = actual need timeline!). FD laddering: Spread ₹10L across 5 FDs (₹2L each 1/2/3/4/5-year tenures = liquidity without breaking all!). Emergency fund: Keep 6-month expenses liquid (savings account, not FD = no penalty risk!). Loan against FD: If need funds, take loan @ 1-2% above FD rate (7% FD, 8-9% loan = continue earning 7% FD, pay 9% loan = net -2% cost vs breaking FD lose 2-3% penalty + compounding = loan cheaper!).

4. Compounding Frequency Mismatch (Bank Says "Quarterly" But Calculator Set "Monthly"!):

  • Example: ₹10L FD @ 7% 10 years, bank quarterly (n=4), calculator monthly (n=12). Calculator (monthly): ₹10L × (1 + 0.07/12)^120 = ₹20,09,661 (₹10.09L interest!). Actual (quarterly): ₹10L × (1 + 0.07/4)^40 = ₹19,89,789 (₹9.89L interest = ₹19,872 LESS = 2% lower!). Why: Monthly = 12 compoundings/year (more frequent = more interest!). Quarterly = 4 compoundings/year (less frequent = less interest!). Gap: ₹19k on ₹10L 10 years = 0.2% annual difference (minor BUT adds up!).
  • Solution: Check FD certificate: Compounding frequency clearly stated (quarterly most common, monthly for online FDs, annual for some govt schemes!). Use EXACT frequency in calculator (quarterly = n=4, NOT monthly n=12!). Effective rate comparison: Bank A 7% quarterly = 7.19% effective. Bank B 7.1% annually = 7.1% effective. A BETTER despite lower nominal (check calculator with both frequencies!).

5. Interest Rounding & Bank-Specific Rules (Banks Round to Nearest ₹, Calculator Shows Decimals!):

  • Example: ₹99,999 FD @ 7.25% 1 year quarterly. Calculator: ₹99,999 × (1 + 0.0725/4)^4 = ₹1,07,463.18. Bank: Rounds each quarter's interest (Q1: ₹1,812.48 → ₹1,812, Q2: ₹1,845 → ₹1,845, Q3: ₹1,878 → ₹1,878, Q4: ₹1,912 → ₹1,912 = total ₹1,07,447!). Difference: ₹16 due to rounding 4 times (calculator no rounding!).
  • Solution: Accept ₹10-50 variance (rounding error, immaterial!). Large FDs: ₹1Cr FD = ₹100-200 rounding difference (0.0002% = ignore!). Bank statements: Final authority (calculator = estimate, bank statement = actual!). Reconciliation: If > ₹1,000 difference on ₹10L FD = investigate (likely TDS or frequency mismatch, NOT rounding!).

Reconciliation Checklist:

  • Step 1: Verify compounding frequency (FD certificate: quarterly, monthly, annual? Match in calculator!)
  • Step 2: Check TDS deductions (bank statement: TDS column? Reduce calculator rate by 1% for estimate!)
  • Step 3: Confirm no premature withdrawal (break FD? Penalty applies, calculator won't match!)
  • Step 4: Interest crediting vs compounding (monthly compounding quarterly crediting? Use n=4!)
  • Step 5: Accept small variance (₹10-100 rounding = normal, > ₹1,000 = investigate!)

Bottom Line: Calculator = IDEAL scenario (no TDS, no penalties, perfect compounding!). Actual FD = real-world (TDS, rounding, crediting delays!). Typical variance: 2-5% lower than calculator (₹14.14L calc → ₹13.5-13.8L actual = normal!). To match calculator: Submit Form 15G/15H (no TDS!), choose true monthly compounding online FD (not quarterly!), hold till maturity (no premature break!), use exact frequency in calculator (quarterly = n=4, NOT monthly!).

If I withdraw interest annually from my FD, does it become simple interest?

YES! Withdrawing interest annually converts compound interest FD into simple interest (₹10L @ 10%: CI ₹27.07L if kept, SI ₹20L if withdrawn = ₹7.07L LOST = 35% less!). Here's why withdrawal kills compounding:

Scenario 1: Compound Interest FD (Interest Reinvested = LEFT in FD!):

  • Setup: ₹10L FD @ 10% 10 years, monthly compounding, interest NOT withdrawn.
  • Year 1: Interest ₹1,04,713 added to principal → Balance ₹11,04,713 (interest STAYS in FD, earns MORE interest!)
  • Year 2: Interest ₹1,15,510 on ₹11.05L → Balance ₹12,20,223 (interest on interest = compounding!)
  • Year 10: Balance ₹27,07,041 (₹17.07L interest earned, principal + interest compounded!)
  • Result: ₹27.07L maturity (2.7× original ₹10L = wealth creation!)

Scenario 2: Simple Interest FD (Interest Withdrawn Annually = TAKEN OUT!):

  • Setup: ₹10L FD @ 10% 10 years, withdraw interest every year.
  • Year 1: Interest ₹1,00,000 withdrawn (₹10L × 10% = ₹1L cash in hand!). Balance: ₹10L (principal unchanged, interest removed!)
  • Year 2: Interest ₹1,00,000 on ₹10L (NOT ₹11L = no compounding!). Withdrawn again. Balance: ₹10L
  • Year 10: Balance ₹10L (principal same, ₹1L × 10 years = ₹10L total interest withdrawn over time!)
  • Result: ₹10L principal + ₹10L withdrawn interest = ₹20L total (2× original, but in separate buckets!)

Comparison:

MetricCI (Interest Reinvested)SI (Interest Withdrawn)Difference
FD Balance₹27,07,041 ✅₹10,00,000+₹17,07,041
Withdrawn Cash₹0₹10,00,000 ✅+₹10,00,000
Total Wealth₹27,07,041 ✅₹20,00,000+₹7,07,041 (35% MORE!)
Interest Earned₹17,07,041 ✅₹10,00,000+₹7,07,041 (70.7% MORE!)
Growth TypeExponential ✅LinearCI accelerates!

Why Withdrawal Kills Compounding:

  • Compounding = Interest on Interest: Year 1: ₹1L interest stays → Year 2: ₹1L original principal interest + ₹10k interest on Year 1 interest = ₹1.1L! Year 3: ₹1L + ₹11k + ₹1.1k = ₹1.21L! Withdrawal: Year 1 ₹1L taken out → Year 2: ₹1L only (NO ₹10k bonus = compounding stopped!).
  • Principal Never Grows: CI: ₹10L → ₹11L → ₹12.2L → ₹13.4L... (growing base!). SI: ₹10L → ₹10L → ₹10L... (static base = constant ₹1L interest forever!).
  • Cumulative Impact: Year 1: CI ₹1.05L vs SI ₹1L = ₹5k more (5% advantage, small!). Year 5: CI ₹1.54L vs SI ₹1L = ₹54k more (54% advantage, growing!). Year 10: CI ₹2.46L vs SI ₹1L = ₹1.46L more (146% advantage, MASSIVE!).

When Withdrawal Makes Sense (SI Acceptable!):

  • Need Monthly Income: Retirees (₹50L FD @ 8% = ₹4L/year = ₹33k/month passive income for living expenses!). Withdraw interest = SI, but necessary for cash flow. Alternative: Annuity or SCSS better (designed for monthly payouts!).
  • Inflation Hedge: ₹10L FD @ 10%, withdraw ₹1L/year spend on inflation-adjusted needs (education fees, medical = must spend!). Keeps ₹10L principal intact (real value erodes, but absolute ₹10L safe!).
  • Tax Optimization: High tax bracket (30%), withdraw interest = taxed annually @ 30% (₹1L interest → ₹70k post-tax, ₹30k TDS!). If kept (CI): ₹17L interest taxed lump sum Year 10 = ₹5.1L tax (vs ₹3L annual = ₹2.1L more tax burden!). But: ₹17L - ₹5.1L = ₹11.9L net > ₹7L annual = CI STILL better despite higher tax!
  • Forced Spending: Entrepreneur (₹10L FD backup), withdraw ₹1L/year for business expenses (reinvesting in business = may earn > 10%!). FD = safety net, withdrawal = working capital (acceptable tradeoff!).

When Reinvestment is CRITICAL (CI Maximize!):

  • Long-term Wealth: Retirement 20-30 years away (₹10L @ 10%: CI 20 years = ₹67L, SI = ₹30L = ₹37L LOST if withdrawn!). Reinvest = exponential growth (wealth creation!). Withdraw = linear (wealth preservation, NOT creation!).
  • Young Investors: Age 25-40 (40-year horizon = CI ₹498L vs SI ₹50L = 10× difference = DON'T withdraw!). Every ₹1L withdrawn Year 1 = ₹49.89L lost by age 65 (50× opportunity cost = devastating!).
  • Goal-Based Investing: Child education in 15 years (₹5L → ₹20.9L CI, ₹12.5L SI = ₹8.4L less if withdrawn = may not cover ₹25L engineering!). Withdraw = goal risk (SI may fall short!). Reinvest = goal safety (CI likely sufficient!).
  • No Cash Flow Need: Salaried (₹15L/year income, ₹10L FD backup = no need to withdraw ₹1L/year!). Reinvest = free money (compounding works silently = wealth grows!). Withdraw = unnecessary (wastes compounding potential!).

Hybrid Strategy (Partial Withdrawal = Moderate Compounding!):

  • Setup: ₹10L FD @ 10%, withdraw 50% interest, reinvest 50%.
  • Year 1: Interest ₹1L, withdraw ₹50k (cash flow!), reinvest ₹50k (compounding!). Balance: ₹10.5L
  • Year 10: Balance ≈ ₹23.5L (₹13.5L interest, ₹5L withdrawn, ₹8.5L reinvested!). Total wealth: ₹23.5L FD + ₹5L withdrawn = ₹28.5L (vs CI ₹27.07L pure, SI ₹20L = middle ground!)
  • Verdict: 50% withdrawal = 80% of full CI benefit (₹28.5L vs ₹27L = 94% of CI!), provides ₹5L cash flow (vs ₹0 full CI!). Best of both worlds for moderate needs!

Bottom Line: Withdraw interest = converts CI to SI (₹27L → ₹20L = ₹7L lost = 35% penalty!). Acceptable if: Need monthly income (retirees!), forced spending (business!), tax optimization (marginal cases!). Avoid if: Long-term wealth goal (20+ years!), no cash need (salaried, young!), goal-based (education, retirement!). Hybrid: Withdraw 30-50% interest, reinvest rest = balance cash flow + compounding (₹23-28L outcome = reasonable compromise!). Calculator: Model both scenarios (reinvest vs withdraw), see ₹7L+ difference = motivates keeping interest in FD!, use SI result if planning to withdraw (realistic expectation!).

How do I calculate effective interest rate when comparing FDs with different compounding frequencies?

Use Effective Annual Rate (EAR) formula: EAR = (1 + r/n)^n - 1, where r = nominal rate, n = compounding frequency! Bank A 7% quarterly (EAR 7.19%) BEATS Bank B 7.1% yearly (EAR 7.1%) despite lower nominal rate! Here's complete comparison framework:

Formula: Effective Annual Rate (EAR)

  • EAR = (1 + r/n)^n - 1
  • r: Nominal annual interest rate (decimal: 7% = 0.07!)
  • n: Compounding frequency per year (yearly=1, half-yearly=2, quarterly=4, monthly=12, daily=365!)
  • Result: Effective annual rate (what you ACTUALLY earn after compounding!)

Example: Compare 3 FDs with Same Nominal 7% Rate

FD A: 7% Compounded Yearly (n=1):

  • EAR = (1 + 0.07/1)^1 - 1 = (1.07)^1 - 1 = 0.07 = 7.00%
  • ₹10L investment: ₹10L × 1.07^10 = ₹19,67,151 (₹9.67L interest!)

FD B: 7% Compounded Quarterly (n=4):

  • EAR = (1 + 0.07/4)^4 - 1 = (1.0175)^4 - 1 = 1.0719 - 1 = 7.19% (+0.19% boost!)
  • ₹10L investment: ₹10L × (1 + 0.07/4)^40 = ₹19,89,789 (₹9.89L interest = ₹22,638 MORE than FD A!)

FD C: 7% Compounded Monthly (n=12):

  • EAR = (1 + 0.07/12)^12 - 1 = (1.005833)^12 - 1 = 1.0723 - 1 = 7.23% (+0.23% boost!)
  • ₹10L investment: ₹10L × (1 + 0.07/12)^120 = ₹20,09,661 (₹10.09L interest = ₹19,872 MORE than FD B, ₹42,510 MORE than FD A!)

Winner: FD C (7% monthly)! Despite SAME nominal rate, monthly compounding earns ₹42,510 more over 10 years (4.3% better than yearly!). EAR 7.23% > 7.19% > 7.00% = choose highest EAR, NOT nominal rate!

Real-World Comparison: Different Nominal Rates, Different Frequencies

Bank A: 7% Quarterly (n=4):

  • EAR = (1 + 0.07/4)^4 - 1 = 7.19%

Bank B: 7.1% Yearly (n=1):

  • EAR = (1 + 0.071/1)^1 - 1 = 7.10%

Bank C: 6.9% Monthly (n=12):

  • EAR = (1 + 0.069/12)^12 - 1 = 7.12%

Ranking by EAR:

  1. Bank A: 7.19% EAR (best! 7% nominal but quarterly = wins!)
  2. Bank C: 7.12% EAR (6.9% nominal but monthly = beats 7.1% yearly!)
  3. Bank B: 7.10% EAR (highest nominal 7.1%, but yearly = loses!)

Lesson: Bank A (lowest nominal 7%) BEATS Bank B (highest nominal 7.1%) due to quarterly compounding! Always check frequency AND rate, calculate EAR before deciding!

EAR Table: Common Rates & Frequencies

Nominal RateYearly (n=1)Quarterly (n=4)Monthly (n=12)Daily (n=365)
6%6.00%6.14%6.17%6.18%
7%7.00%7.19%7.23%7.25%
8%8.00%8.24%8.30%8.33%
10%10.00%10.38%10.47%10.52%
12%12.00%12.55%12.68%12.75%

Observations:

  • Higher nominal rate = bigger EAR boost: 6% monthly +0.17%, 12% monthly +0.68% (boost scales with rate!)
  • Diminishing returns beyond monthly: Monthly → daily adds only 0.02-0.07% (negligible = prioritize monthly, don't hunt daily!)
  • Quarterly close to monthly: 10% quarterly 10.38%, monthly 10.47% = 0.09% difference (quarterly acceptable, monthly ideal!)

Quick Mental Math (Approximate EAR Without Calculator!):

  • Quarterly = Nominal + (Nominal)^2 / 400: 7% quarterly ≈ 7 + 49/400 ≈ 7 + 0.12 ≈ 7.12% (actual 7.19% = close!)
  • Monthly = Nominal + (Nominal)^2 / 200: 7% monthly ≈ 7 + 49/200 ≈ 7 + 0.25 ≈ 7.25% (actual 7.23% = very close!)

Decision Framework:

  • Step 1: List all FD options (Bank A 7% quarterly, Bank B 7.1% yearly, Bank C 6.9% monthly!)
  • Step 2: Calculate EAR for each (use formula or table above!)
  • Step 3: Rank by EAR (highest EAR = best returns!)
  • Step 4: Check other factors (DICGC coverage, bank reputation, premature withdrawal penalty, online vs branch = tiebreakers!)
  • Step 5: Choose highest EAR (EAR = final verdict, frequency + rate combined!).

Bottom Line: Never compare FDs by nominal rate alone (7.1% yearly LOSES to 7% quarterly!). Always calculate EAR = (1 + r/n)^n - 1 (effective rate after compounding!). Use SI vs CI calculator: Input each FD's rate + frequency, see maturity amount, choose highest! Priority: Monthly ≈ Quarterly > Half-yearly > Yearly (daily negligible boost!). Example: ₹10L 10 years, 7% monthly (₹20.09L) BEATS 7.1% yearly (₹19.76L) by ₹33k = frequency matters!

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