Compound Interest Formula: A = P(1 + r/n)^(nt). At 12% annual rate compounded monthly, ₹1 lakh becomes ₹3.3 lakhs in 10 years and ₹11 lakhs in 20 years.
Compound Interest — Key Questions
What is the compound interest formula?+
Compound Interest formula: A = P(1 + r/n)^(nt), where A = final amount, P = principal, r = annual interest rate (decimal), n = compounding frequency per year, t = time in years. CI = A - P. For ₹1 lakh at 12% monthly for 10 years: A = 1,00,000 × (1+0.12/12)^(12×10) = ₹3,30,039. Interest earned = ₹2,30,039.
Compound interest vs simple interest — what is the difference?+
Simple Interest = P × R × T / 100. It is calculated only on the original principal. Compound interest is calculated on principal plus accumulated interest — each period's interest becomes next period's principal. At 12% for 10 years on ₹1 lakh: Simple interest = ₹1.2 lakh (total ₹2.2L), Compound monthly = ₹2.3 lakh (total ₹3.3L). The difference widens dramatically over longer periods.
Which compounding frequency gives the highest return?+
More frequent compounding = higher effective annual yield. At 12% nominal rate on ₹1 lakh for 10 years: Annual compounding = ₹3.10L, Quarterly = ₹3.26L, Monthly = ₹3.30L, Daily = ₹3.32L. Most Indian FDs compound quarterly. Most SIP returns behave as monthly compounding. The difference between monthly and daily is minimal — choose monthly for realistic projections.