The simple interest formula
SI = P × R × T / 100
P is the principal (the original amount), R is the annual interest rate in percent, and T is time in years. On a ₹1 lakh deposit at 8% for 3 years: SI = 1,00,000 × 8 × 3 / 100 = ₹24,000. Total maturity amount = ₹1,24,000.
That’s the whole formula. No compounding, no quarterly rests, no surprises.
Where simple interest is used in India
Post office time deposits (1–3 year tenures) pay simple interest annually. Kisan Vikas Patra pays simple interest for the first part of its tenure. Some NBFCs and chit funds quote simple interest rates. Car loans and personal loans often present EMI calculations built on a flat rate — which is a form of simple interest applied to the original principal throughout the loan, making the effective rate roughly double the quoted flat rate.
That last point catches a lot of people. A personal loan at “6% flat” sounds cheap. But since you’re paying down the principal each month, you’re effectively paying interest on money you no longer owe. The actual annualised rate (APR) on a 6% flat loan is around 11–12%. Banks now have to disclose APR under RBI guidelines, but many lenders still lead with the flat rate in marketing.
Simple interest vs compound interest
With simple interest, interest is always calculated on the original principal. With compound interest, interest earns interest. The difference becomes significant over longer periods.
₹1 lakh at 8% for 10 years:
- Simple interest: ₹80,000 interest, total ₹1.8 lakh
- Compound interest (annual): ₹1,15,892 interest, total ₹2.16 lakh
For short durations (under 2 years), the difference is small. Over 10+ years, compound interest produces meaningfully more. Most investments — FDs, RDs, mutual funds — use compound interest. Use the compound interest calculator to compare.
Sources
- Reserve Bank of India — Master Direction on Interest Rate on Deposits (2016, updated 2024): guidelines on interest calculation methods for scheduled banks
- RBI Circular RBI/2013-14/527 — disclosure of annualised interest rates (APR) for all retail loans