Simple vs. Compound Interest
✓ Last verified 14 Sep 2026
The short version
Simple interest is calculated only on the original principal every year; compound interest is calculated on the principal plus all previously earned interest - the same rate produces a meaningfully bigger number under compounding the longer the money sits.
On ₹1,00,000 at 10% a year, simple interest pays exactly ₹10,000 every single year, so after 10 years you'd have ₹2,00,000 (principal plus 10 flat instalments of interest). Compound interest instead adds each year's interest back to the principal before calculating the next year's interest, so the base grows every year - the same ₹1,00,000 at 10% compounded annually grows to roughly ₹2,59,000 over the same 10 years. Most everyday financial products - savings accounts, fixed deposits, mutual fund returns - work on compound interest; simple interest shows up mainly in certain short-term loans and some legal/penalty-interest calculations.
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