Compound interest means you earn returns on your original money and on the returns it has already earned, so growth speeds up over time. ₹1 lakh at an assumed 12% a year roughly doubles in 6 years and becomes about ₹9.6 lakh in 20 years without another rupee added. Time matters more than amount: starting a SIP at 25 instead of 35 can leave you with over three times as much at 60.
Key Takeaways
- Simple interest pays only on what you put in; compound interest also pays on past interest.
- The longer money stays invested, the faster it grows; most of the gain comes in the later years.
- The Rule of 72 gives a quick estimate: divide 72 by the yearly return to get the years to double.
- Compounding also works against you, through inflation and unpaid credit card balances.
- All return figures here are assumptions for illustration; market-linked returns are not guaranteed.
What is compound interest?
With simple interest, you earn interest only on the amount you first invested. With compound interest, each year's interest is added to your balance, and next year's interest is calculated on that bigger balance. You earn interest on your interest.
Take ₹1,00,000 at 10% a year. Simple interest pays a flat ₹10,000 every year. Compound interest pays ₹10,000 in year one, ₹11,000 in year two (10% of ₹1,10,000) and ₹12,100 in year three, and the gap keeps widening:
| After | Simple interest | Compound interest | Extra from compounding |
|---|---|---|---|
| 1 year | ₹1,10,000 | ₹1,10,000 | ₹0 |
| 2 years | ₹1,20,000 | ₹1,21,000 | ₹1,000 |
| 3 years | ₹1,30,000 | ₹1,33,100 | ₹3,100 |
| 5 years | ₹1,50,000 | ₹1,61,051 | ₹11,051 |
| 10 years | ₹2,00,000 | ₹2,59,374 | ₹59,374 |
In the first two years the difference is tiny, which is why many people give up on investing too early. By year ten, compounding has added almost ₹60,000 that simple interest never would.
The compound interest formula in plain words
The formula is A = P × (1 + r/n)^(n × t). In words: the final amount (A) equals what you start with (P), multiplied by one plus the yearly rate divided by the number of times interest is added each year (r/n), raised to the total number of times interest is added (n × t).
For ₹1,00,000 at 12% compounded once a year for 10 years: 1,00,000 × 1.12 multiplied by itself 10 times = ₹3,10,585. You do not need to work this out by hand; our compound interest calculator does it for any amount, rate and period.
How time changes the result
Here is a one-time ₹1 lakh investment left untouched at different assumed rates. A 7% rate is close to what a bank FD has paid in recent years before tax; 10% and 12% are illustrative long-term assumptions for equity mutual funds, which can be higher or lower and are never guaranteed.
| Assumed yearly return | 10 years | 20 years | 30 years |
|---|---|---|---|
| 7% | ₹1.97 lakh | ₹3.87 lakh | ₹7.61 lakh |
| 10% | ₹2.59 lakh | ₹6.73 lakh | ₹17.45 lakh |
| 12% | ₹3.11 lakh | ₹9.65 lakh | ₹29.96 lakh |
Two things stand out. First, the last ten years add far more than the first ten: at 12%, the first decade adds about ₹2.1 lakh and the third adds about ₹20 lakh. Second, a few percentage points of return make a large difference over long periods, which is why costs, taxes and the asset you choose matter.
How often interest is added
The more often interest is added, the faster the balance grows. Most bank FDs in India compound quarterly. On ₹1,00,000 for 5 years at 7%:
- Compounded once a year: ₹1,40,255
- Compounded every quarter: ₹1,41,478, which works out to about 7.19% a year
The difference is small for one deposit, but it is why banks quote an "effective yield" next to the headline rate. Remember that FD interest is taxed at your slab rate every year, which reduces what actually compounds.
How SIPs compound
A SIP adds money every month, and each instalment starts compounding from the month it is invested. The table shows what a monthly SIP could grow to at assumed returns of 10% and 12% a year:
| Monthly SIP | Assumed return | 10 years | 20 years | 30 years |
|---|---|---|---|---|
| ₹1,000 | 10% | ₹2.07 lakh | ₹7.66 lakh | ₹22.79 lakh |
| ₹1,000 | 12% | ₹2.32 lakh | ₹9.99 lakh | ₹35.30 lakh |
| ₹5,000 | 10% | ₹10.33 lakh | ₹38.28 lakh | ₹1.14 crore |
| ₹5,000 | 12% | ₹11.62 lakh | ₹49.96 lakh | ₹1.76 crore |
| You invest (₹1,000 / ₹5,000 a month) | ₹1.2 / ₹6 lakh | ₹2.4 / ₹12 lakh | ₹3.6 / ₹18 lakh | |
These are illustrations, not promises. Real equity returns arrive unevenly, with good and bad years. Raising the SIP as your income grows adds even more; see our guide to step-up SIPs, or start small with a ₹500 SIP. Try your own numbers on the SIP calculator.
The real cost of starting late
Meet Arun and Bala. Both invest ₹5,000 a month and both earn an assumed 12% a year.
- Arun starts at 25, invests for only 10 years and stops at 35. He puts in ₹6 lakh, then leaves it alone until 60.
- Bala starts at 35 and invests every month until 60. He puts in ₹15 lakh.
At 60, Arun's ₹6 lakh has grown to about ₹2.30 crore. Bala's ₹15 lakh has grown to about ₹95 lakh. Arun invested less than half as much and still has more than twice the amount, purely because his money had 10 extra years to compound.
Had Arun simply continued his ₹5,000 SIP from 25 all the way to 60, he would have about ₹3.25 crore, more than three times Bala's figure. At a more cautious assumed 10%, the two numbers are about ₹1.91 crore and ₹67 lakh: lower, but the gap is just as wide.
The Rule of 72
To estimate how long money takes to double, divide 72 by the yearly return. It is a shortcut, but it is close for the rates most investors see:
| Yearly return | Rule of 72 estimate | Exact years to double |
|---|---|---|
| 6% | 12.0 years | 11.9 years |
| 7% | 10.3 years | 10.2 years |
| 8% | 9.0 years | 9.0 years |
| 10% | 7.2 years | 7.3 years |
| 12% | 6.0 years | 6.1 years |
At 12%, money doubles about five times in 30 years, which is why ₹1 lakh becomes about ₹30 lakh in the earlier table. The same rule works for inflation: at 6% inflation, prices roughly double every 12 years.
How inflation compounds against you
Inflation compounds too, quietly shrinking what your money can buy. Assuming 6% a year, something that costs ₹1 lakh today would cost about ₹3.2 lakh in 20 years. Put the other way, ₹1 lakh kept idle for 20 years buys only what about ₹31,000 buys today. Even at 5% inflation, the cost rises to about ₹2.65 lakh.
That is why the return that matters is the one after inflation and tax. A savings account or FD that pays less than inflation after tax is losing value in real terms, however safe it feels. Money for goals 10 or more years away usually needs some exposure to growth assets to keep ahead.
How compounding works on debt
Unpaid debt compounds against you, and credit cards are the worst case. Cards in India typically charge about 3–3.75% a month on unpaid balances. At 3.5% a month, which is about 51% a year once compounding is counted, an unpaid ₹50,000 grows to about ₹75,500 in one year and about ₹1.73 lakh in three years, before late fees and GST on interest.
No investment reliably earns that much, so clearing high-interest debt comes before investing. Paying only the minimum due keeps your record clean but leaves the rest compounding. Late payments also hurt your credit score; see our guide on how to improve your CIBIL score.
How to make compounding work for you
- Start now, even with a small amount; time does more work than the amount
- Choose growth options in mutual funds so gains are reinvested, not paid out
- Raise your SIP when your income rises
- Keep investing through market falls; stopping breaks the compounding chain
- Avoid dipping into long-term investments for short-term spending
- Clear credit card and other high-interest debt first
Frequently Asked Questions
What is compound interest in simple words?
It is interest on interest. ₹1 lakh at 10% earns ₹10,000 in the first year; in the second year it earns 10% on ₹1,10,000, which is ₹11,000, and so on.
How is compound interest calculated?
Use A = P × (1 + r/n)^(n × t), where P is the starting amount, r the yearly rate, n how many times a year interest is added and t the number of years. ₹1 lakh at 12% compounded yearly for 10 years gives ₹3,10,585.
Does a SIP earn compound interest?
A SIP does not pay interest, but its returns compound in the same way because gains stay invested. ₹5,000 a month for 20 years at an assumed 12% grows to about ₹50 lakh from ₹12 lakh invested; actual returns can differ.
What is the Rule of 72?
Divide 72 by the yearly return to estimate the years needed to double your money. At 12% that is about 6 years; at 7%, about 10 years.
Which investments compound in India?
Almost all do: FDs, PPF, EPF, NPS and mutual funds. The difference is the rate, the risk and the tax. FD and savings interest is taxed every year, while gains in equity mutual funds are taxed only when you sell.
How much does ₹1,000 a month become in 20 years?
About ₹10 lakh at an assumed 12% a year, or about ₹7.7 lakh at 10%, from ₹2.4 lakh invested. Actual market returns may be higher or lower.
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Disclaimer: This article is for education only and is not investment, tax or legal advice. Figures and rules are stated as understood on the date shown and can change. Return figures are illustrative or historical, not guaranteed; past performance does not guarantee future results. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Insurance is the subject matter of solicitation. Hatlet Ventures is an AMFI-registered mutual fund distributor (ARN-345155), not a SEBI-registered investment adviser.
