Compound Interest

Compound interest is the engine behind cumulative FD growth. Unlike simple interest (calculated only on the original principal), compound interest includes interest earned in previous periods. Indian banks typically compound FD interest quarterly. The formula is A = P x (1 + r/n)^(n x t), where P is principal, r is annual rate, n is compounding frequency per year, and t is tenure in years. Quarterly compounding (n=4) at 7% yields more than annual compounding (n=1) at the same rate. On ₹5,00,000 for 5 years at 7%: quarterly compounding gives ₹7,07,391; annual compounding gives ₹7,01,276 — a difference of ₹6,115. The more frequently interest compounds, the higher the effective yield. This is why comparing the effective annual rate matters more than the nominal rate when evaluating FDs across banks.