Simple interest and maturity.
Simple interest
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Maturity amount
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The one formula worth memorising
Simple interest is the most honest piece of arithmetic in personal finance, and it is built on a single line: interest equals principal times rate times time, written P x R x T. The rate is annual and entered as a decimal, so 9% becomes 0.09, and time is in years. The defining feature is that interest is always charged on the original principal and never on the interest already accrued. Year one earns the same as year five. That is the whole difference from compound interest, where each period’s interest joins the pile and earns more interest of its own. This tool returns both the interest and the maturity amount, which is just the principal added back to the interest.
Where you will actually meet simple interest in India
Most bank deposits and modern loans compound, so simple interest sounds academic until you notice how often it still governs real money here. Car loans and many personal loans quoted on a flat rate use simple interest on the original amount, which is exactly why a flat rate always works out costlier than the same number quoted as a reducing-balance rate. Money lent between family or friends is almost always settled on simple interest because it is easy to verify by hand. Some short-tenure fixed deposits, the interest on delayed tax refunds, and certain post office certificates also run on simple interest. Knowing the formula lets you sanity-check a lender’s number on the back of an envelope, which is a genuinely useful habit.
Worked example: ₹1 lakh at 9% for three years
Lend or invest ₹1,00,000 at 9% a year for three years on a simple-interest basis. The calculation is deliberately plain.
| Step | Value |
|---|---|
| Principal (P) | ₹1,00,000 |
| Rate (R) | 9% per year |
| Time (T) | 3 years |
| Interest each year (₹1,00,000 x 9%) | ₹9,000 |
| Total interest (₹9,000 x 3) | ₹27,000 |
| Maturity amount | ₹1,27,000 |
Notice the flat ₹9,000 in every bar of the chart below. Under compounding, those later bars would each be a little taller, because the interest itself would start earning. Over three years the gap is small; over twenty it becomes enormous.
The flat-rate trap when you borrow
This is where the formula saves you real money. Lenders advertising a "flat rate" of, say, 9% on a car loan charge simple interest on the full original loan for the entire tenure, even though you are steadily paying the principal down. On a reducing-balance basis, the same cash outflow corresponds to an effective rate that is usually 1.7 to 1.9 times the flat rate. So a 9% flat loan is really costing you something close to 16% to 17% in reducing-balance terms. Always ask a lender to quote the reducing-balance rate, or the annual percentage rate, before comparing offers. When you save, the same simplicity works against you: a simple-interest instrument will lag a compounding one over long horizons, so prefer compounding products such as cumulative fixed deposits for genuinely long-term money.
How do I handle a period in months rather than years?
Convert months to a fraction of a year before applying the formula. Nine months is 0.75 years, eighteen months is 1.5 years. This calculator accepts decimal years, so enter 1.5 rather than 18 if you are working in months.
Is the interest I earn taxable?
Yes. Interest income, whether simple or compound, is taxable as income from other sources and added to your total income at your slab rate. The method of calculation does not change the tax treatment, only the amount on which you are taxed.