Money Guides
Fixed Deposit Interest: Simple vs Compound
Two fixed deposits at the same rate can pay different amounts. The difference is how often the interest is added back and earns interest itself.
OEWER Team1 min read
When you open a fixed deposit (FD), the bank pays interest on your money. How that interest is calculated decides how much you get at the end.
Simple interest
With simple interest, you earn interest only on the amount you put in. The formula is maturity = principal × (1 + rate × years).
₹1,00,000 at 7% for 3 years earns ₹21,000 of interest, so you receive ₹1,21,000.
Compound interest
With compound interest, interest is added to the deposit at regular intervals, and then that interest earns interest too. The formula is maturity = principal × (1 + rate ÷ n)^(n × years), where n is how many times a year interest is added.
The same ₹1,00,000 at 7% for 3 years, compounded quarterly, grows to about ₹1,23,144. That is ₹2,144 more than simple interest.
Does compounding frequency matter?
A little. For the same ₹1,00,000 at 7% over 3 years:
- Yearly compounding gives about ₹1,22,504.
- Quarterly compounding gives about ₹1,23,144.
- Monthly compounding gives about ₹1,23,293.
The more often interest is added, the more you earn, but the gains get smaller each step. Most banks compound fixed deposits quarterly.
Try it yourself
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