Same rate, different base
Two accounts can both pay 8% a year and end up far apart. The difference is what the 8% is calculated on.
- Simple interest is always 8% of the original ₹1,00,000, which is ₹8,000 every year.
- Compound interest is 8% of the current balance. Year one earns ₹8,000. Year two earns 8% of ₹1,08,000, which is ₹8,640. Each year the interest is larger than the one before.
You can try both on the simple interest calculator and the compound interest calculator.
₹1 lakh at 8% a year
| Years | Simple interest | Compound interest |
|---|---|---|
| 5 | ₹1,40,000 | ₹1,46,933 |
| 10 | ₹1,80,000 | ₹2,15,892 |
| 20 | ₹2,60,000 | ₹4,66,096 |
| 30 | ₹3,40,000 | ₹10,06,266 |
For the first few years the two are close, which is why compounding feels unimpressive early on. By year 10 compounding is ahead by about ₹36,000. By year 30 it is ahead by about ₹6.66 lakh, and the compound balance is nearly three times the simple one.
The simple column grows by the same ₹8,000 a year forever. The compound column grows by a bigger amount every year, so most of its gain arrives late. That is the argument for starting early: the last decade of a long investment does more work than the first two combined.
Where the gap comes from
In the compound case, the interest in year 30 is 8% of about ₹9.3 lakh, which is roughly ₹75,000 for a single year. The simple account earns ₹8,000 in that same year. Nothing about the rate changed; the base did.
This is also why a small difference in rate matters over long periods. Our walkthrough of the impact-of-1-percent calculator shows how a one-point change compounds into a large gap.
The same maths works against borrowers
A loan or card balance that compounds grows the same way. Unpaid interest is added to the balance and then earns interest itself. Our post on credit card interest shows how quickly that builds.
What to check in a product
- Paid out or reinvested? An instrument that pays interest to your bank account each period behaves like simple interest, because the base does not grow. One that adds it back compounds.
- How often is it added? Monthly, quarterly and annual compounding differ slightly, covered in our note on compounding frequency.
- What is the real rate? A quoted "flat" rate on a loan is not comparable to a reducing-balance rate. See flat vs reducing rate.
This post is educational, not financial advice. The 8% rate is an assumption for illustration, not a forecast or an offer.
Frequently asked questions
What is the difference between simple and compound interest?
Simple interest is earned only on the original amount. Compound interest is earned on the original amount plus the interest already added, so the base grows each period.
Which products pay simple interest?
Some personal and vehicle loans quote a flat or simple rate, and some short instruments pay interest out instead of reinvesting it. Always check whether interest is paid out or added back to the balance.
Is compound interest always better?
For an investor, yes, because the base grows. For a borrower it works against you, which is why unpaid balances grow faster than people expect.
This is commentary on published data, not investment advice. WealthTicker is not a SEBI-registered adviser or distributor. Figures are as of the dates stated and can be revised by their source.
Keep reading
Interest-free home loan with a SIP: does the maths hold?
On ₹50 lakh at 8.5% for 20 years, a ₹5,419 SIP at 12% grows to the ₹54.1 lakh of interest. Earn 10% and it is ₹12.6 lakh short. What the idea assumes.
How to invest ₹1 lakh: a plan by time horizon
Where to put ₹1 lakh depends on when you need it. Three checks before investing, then options for under a year, one to three years, and five years or more.
Monthly, quarterly or yearly compounding: does it matter?
At 8% a year, ₹1 lakh grows to ₹2.16 lakh with annual compounding and ₹2.22 lakh with monthly compounding over 10 years.