The formula and a worked example
Simple interest is calculated only on the original principal, every period: SI = P × R × T ÷ 100, where P is the principal, R the yearly rate in percent, and T the time in years. Total amount = P + SI.
₹1,00,000 at 8% for 5 years: SI = 100000 × 8 × 5 ÷ 100 = ₹40,000, so the total is ₹1,40,000. The interest is a flat ₹8,000 every single year — year five earns exactly what year one did, because the interest never joins the principal.
Where simple interest still shows up in real life
Compound interest dominates banking, but simple interest is alive in specific corners:
- Gold loans and some short-term lending quote simple interest per month — 1% monthly simple = 12% yearly on the original amount.
- Payout FDs effectively pay simple interest: the interest is transferred out monthly or quarterly, so it never compounds.
- Courts and arbitration awards commonly grant simple interest on dues; income-tax refunds accrue simple interest at 0.5% per month.
- Informal lending between individuals is traditionally quoted in simple 'rupees per hundred per month' — ₹2 sekda means 2% simple per month, i.e. 24% a year.
- Bank and government exams: SI questions are a fixed feature of every quantitative aptitude paper — this tool checks your worked answers.
Simple vs compound — the gap that grows
In year one, simple and compound interest are identical. From year two, compound pulls ahead — it earns interest on interest — and the gap accelerates: at 8%, the difference on ₹1 lakh is about ₹6,900 after 5 years, ₹56,000 after 15, and ₹3.66 lakh after 25. The comparison line in the calculator shows this gap live for your numbers.
The practical lesson cuts both ways: as a saver, prefer products that compound (cumulative FDs over payout FDs, growth funds over dividend plans). As a borrower, a simple-interest loan is friendlier than a compounding one at the same rate — which is exactly why credit cards, which compound monthly, are the most expensive common debt.
Frequently asked questions
›What is the simple interest formula?
SI = P × R × T ÷ 100 — principal times yearly rate times time in years, divided by 100. Total amount = principal + SI. For ₹50,000 at 10% for 3 years: 50000 × 10 × 3 ÷ 100 = ₹15,000 interest.
›How do I calculate simple interest for months instead of years?
Convert months to years by dividing by 12. Nine months = 0.75 years, so ₹1 lakh at 12% for 9 months = 100000 × 12 × 0.75 ÷ 100 = ₹9,000. For a monthly rate, multiply by 12 first: 1.5% monthly = 18% yearly.
›What is the difference between simple and compound interest?
Simple interest is computed only on the original principal — a flat amount every year. Compound interest is computed on principal plus accumulated interest, so it grows faster every year. Over 5 years at 8%, ₹1 lakh earns ₹40,000 simple but ₹46,933 compound.
›Do banks use simple or compound interest?
Deposits: compound (FDs quarterly, savings accounts credited quarterly). Loans: interest accrues monthly on the reducing balance. True simple interest survives mainly in gold loans, payout FDs, court awards, tax-refund interest and informal lending.
›What does '2 rupees sekda' mean in informal lending?
₹2 per ₹100 per month — 2% simple interest monthly, which is 24% a year. Informal rates quoted per month sound small but annualise steeply; always multiply by 12 before comparing with a bank loan rate.