The formula
A = P × (1 + r/n)n × t
P is the principal, r the yearly rate, n the number of times interest is added each year and t the number of years. Compound interest = A − P.
Example
₹1,00,000 at 8% for 5 years compounded yearly becomes ₹1,46,933; compounded quarterly, ₹1,48,595. Simple interest would give only ₹1,40,000.
Simple interest
SI = P × r × t ÷ 100
Interest is earned only on the original amount. Some loans from friends and family, and the interest on certain bonds paid out each year, work this way.
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Questions people ask
Which compounding is best?
The more often interest is added, the more you earn, but the difference shrinks: at 8%, yearly compounding gives an effective 8.00%, quarterly 8.24%, monthly 8.30% and daily 8.33%.