Compound vs Simple Interest: FD Examples With Real Numbers

Your bank app offers a 5-year fixed deposit at 7%. A relative who needs money says they'll pay you 7% a year too, "simple interest, same thing." It isn't the same thing. On ₹1,00,000 over five years, the gap between those two promises is more than ₹6,000, and it gets wider every year you wait.

This guide explains simple and compound interest with FD-style numbers you can check yourself, shows where each one actually shows up in Indian banking, and walks you through the Compound Interest Calculator so you can run your own figures.

This is general information, not financial or tax advice. Check your bank's deposit terms and current tax rules before you invest.

The one difference that matters

Simple interest is calculated only on the amount you started with. If you put in ₹1,00,000 at 7%, you earn ₹7,000 every year. Year one, year five, year twenty: always ₹7,000.

The formula is short: Interest = P × R × T ÷ 100, where P is the principal, R is the yearly rate in percent and T is the number of years.

Compound interest adds each interest payment back to your balance, and the next round of interest is calculated on that bigger balance. You earn interest on your interest. The formula is A = P × (1 + r/n)^(n × t), where A is the maturity amount, r is the rate as a decimal (0.07, not 7), n is how many times a year interest is added, and t is the number of years.

That n is the part people skip. Interest added once a year (annual compounding) grows more slowly than interest added every quarter or every month, even at the same headline rate.

Worked example: ₹1,00,000 at 7% for 5 years

Here's the same deposit under different rules. All figures are rounded to the nearest rupee.

• Simple interest: ₹1,00,000 × 7 × 5 ÷ 100 = ₹35,000 interest. Maturity: ₹1,35,000.
• Compounded annually: ₹1,00,000 × (1.07)^5 = ₹1,40,255. Interest: ₹40,255.
• Compounded quarterly: ₹1,00,000 × (1 + 0.07/4)^20 = ₹1,41,478. Interest: ₹41,478.
• Compounded monthly: ₹1,00,000 × (1 + 0.07/12)^60 = ₹1,41,763. Interest: ₹41,763.

Two things jump out. First, compounding beats simple interest by about ₹6,478 here (quarterly vs simple). Second, the jump from annual to quarterly compounding is worth more than the jump from quarterly to monthly. Frequency helps, but with diminishing returns.

Now stretch the time. Over 20 years at the same 7%, the maturity amounts are:

• Simple interest: ₹2,40,000
• Compounded quarterly: ₹4,00,639

Over five years the difference is a nice bonus. Over twenty, compounding gives you about ₹1.6 lakh more on the same deposit. That's why time matters more than squeezing out an extra compounding period.

Where you'll actually meet each type in India

Cumulative (reinvestment) FDs compound. SBI's reinvestment plan, for example, states that interest is compounded quarterly and paid at the end of the term, with a minimum period of six months. Many banks follow a similar quarterly pattern, but check your own bank's terms.

Interest-payout FDs behave like simple interest for you. If you choose monthly or quarterly payouts, the interest leaves the deposit and lands in your savings account. Your principal never grows. On ₹1,00,000 at 7% with quarterly payouts, you'd receive ₹1,750 every quarter, which adds up to ₹35,000 over five years. That's the simple interest figure, about ₹6,478 less than the cumulative option. Payouts make sense if you need the income (many retirees do). If you don't, the cumulative option usually wins.

Informal loans between friends, family or small lenders are usually quoted as simple interest. Lend ₹50,000 at 12% simple interest for two years and you get ₹12,000 in interest, no more.

Bank loans with EMIs are a third case. They use a reducing-balance method, where interest is charged on the outstanding amount each month. Neither of the two formulas above gives you the EMI directly. For that, use the EMI Calculator.

How to calculate it with the Compound Interest Calculator

The calculator handles one-time lump sums, which is exactly what an FD is. Results update as you type, so there's no button to press.

1. Open the Compound Interest Calculator.
2. Type your deposit amount in Principal, for example 100000.
3. Enter the rate in Annual Rate (%) as a whole number: 7, not 0.07.
4. Pick the Compounding Frequency: Annually, Semi-annually, Quarterly, Monthly or Daily. For most cumulative bank FDs, Quarterly is the one to try first.
5. Enter the number of Years.
6. Read the three summary boxes: Final Amount, Total Interest and Principal.
7. Scroll the Year-by-Year Breakdown table to see the balance and interest earned each year. Watch the interest column grow; that's compounding in action.

The tool doesn't calculate simple interest, but you don't need it to. Simple interest is one multiplication. If you'd rather not do it in your head, find 7% of 1,00,000 with the Percentage Calculator and multiply the answer by the number of years.

Expect small differences from your bank's maturity figure. Banks apply their own day-count rules, and short deposits may be handled differently. Your bank's FD receipt or deposit advice is the final word.

A quick way to compare offers: effective yield

When two FDs quote the same rate but compound differently, compare what you'd earn over one full year. That's the effective annual yield.

• 7% compounded quarterly: (1 + 0.07/4)^4 − 1 = 7.19% a year.
• 7% compounded monthly: 7.23% a year.
• 7% simple interest: just 7%.

Easiest way to get this: set Years to 1 in the calculator and look at Total Interest. ₹7,186 on ₹1,00,000 means a 7.19% effective yield.

And if you want a rough "when does my money double?" answer, use the Rule of 72: divide 72 by the rate. At 7%, that's about 10.3 years. The exact figure with quarterly compounding is close to 10 years. With simple interest it takes over 14 years, because 100 ÷ 7 is about 14.3.

Mistakes to avoid

• Typing the rate as a decimal. The calculator expects 7 for 7%. Entering 0.07 gives you a near-zero result.
• Comparing headline rates only. An FD at 7% with quarterly compounding beats one at 7% paid out every quarter, even though both say "7%".
• Forgetting tax. FD interest is generally taxed as income at your slab rate, and banks may deduct TDS once interest crosses a threshold. The calculator shows pre-tax numbers, and it doesn't adjust for inflation either.
• Using the FD calculator for monthly investing. If you add money every month, that's a SIP or recurring deposit, not a lump sum. Use the SIP Calculator for that.

If you're weighing an FD against investing or a loan, our posts on EMI vs SIP and step-up SIPs go through those numbers the same way.

Frequently Asked Questions

Is compound interest always better than simple interest?

For you as a saver, yes, at the same rate and duration. Over one year with annual compounding, the two give the same result. The gap appears once interest is added more often than yearly or the deposit runs past a year, and it widens with time. As a borrower, simple interest costs you less.

How often do Indian banks compound FD interest?

Quarterly is common for cumulative FDs. SBI's reinvestment plan, for instance, says interest is compounded quarterly. Rules for very short deposits and payout options vary, so read your bank's deposit terms or ask the branch.

Does choosing monthly interest payout reduce my returns?

Usually, yes. The interest is paid out instead of being added to your deposit, so it doesn't earn further interest. Some banks also pay a slightly discounted rate for monthly payouts. If you don't need the regular income, a cumulative FD typically gives a higher maturity amount.

Why doesn't the calculator match my bank's maturity amount exactly?

Banks calculate using their own day-count conventions and rounding, and some treat short or odd-period deposits differently. The calculator uses the standard formula and rounds to two decimals, so expect a small difference. Treat the bank's figure as final.

Can I use the Compound Interest Calculator for an RD or SIP?

No. It only handles a single lump sum. For regular monthly investments, use the SIP Calculator, and for recurring deposits check your bank's own RD calculator, since RD interest rules vary by bank.