How compound interest works
Each time interest is added, the next interest is worked out on the bigger amount, so the money grows faster every year. Amount = principal × (1 + rate ÷ n)n × years, where n is how many times a year interest is added.
The more often interest is added, the slightly more you earn: 8% added every quarter is the same as about 8.24% a year. Most Indian bank fixed deposits add interest every quarter.
The rule of 72: divide 72 by the interest rate to get roughly the years it takes to double your money. At 8%, about 9 years.
Frequently asked questions
Simple or compound interest?
Simple interest is paid only on the money you put in. Compound interest is also paid on the interest already earned, so it grows faster the longer you keep the money in.
Is FD interest taxed?
Yes, at your income-tax slab rate, every year as it is earned, even if you get it only at maturity. Banks deduct TDS above a limit. Enter your slab to see what you keep.
Where is interest compounded monthly?
Some recurring deposits, savings schemes and most loans. For loans the same compounding works against you.