Simple vs Compound Interest — and Why Inflation Matters
Updated 2026-10-30
Quick answer: Simple interest is earned only on the principal (P × R × T ÷ 100). Compound interest is also earned on past interest (P × (1 + r)^n), so the gap widens every year. Inflation works the same way in reverse, shrinking what your money can buy.
Open the Simple Interest Calculator →
Side-by-side
₹1 lakh at 10% for 10 years: simple interest gives ₹2 lakh; annual compounding gives about ₹2.59 lakh.
Real returns
A 7% deposit with 6% inflation grows your purchasing power by only about 1% a year (before tax). Always compare returns with inflation.
FAQs
Which is used for loans in India?
Bank loans use reducing-balance interest, which compounds monthly on the outstanding principal. Some short-term or informal loans quote flat (simple) rates.