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Compound Interest Calculator
What is Compound Interest?
Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Often called "interest on interest," it can cause wealth to grow at a faster rate than simple interest, which is calculated only on the principal amount.
Key Factors of Compounding
The power of compound interest is influenced by several key factors:
- Principal Amount: The initial amount of money you invest. A larger principal leads to larger returns.
- Interest Rate: The rate at which your investment grows. A higher rate accelerates growth.
- Investment Period: The length of time your money is invested. The longer the period, the more significant the compounding effect.
- Compounding Frequency: How often the interest is calculated and added to the principal (e.g., annually, quarterly, monthly). More frequent compounding leads to slightly higher returns.
Taxation on Interest Income
The interest earned from investments is generally taxable. It is added to your total income for the financial year and taxed according to your applicable income tax slab. Financial institutions may deduct Tax at Source (TDS) if your interest income exceeds a certain threshold.
Compounding Investment Strategy
To make the most of compound interest:
- Start Early: The earlier you start investing, the more time your money has to grow, maximizing the benefits of compounding.
- Invest Regularly: Consistently adding to your principal amount can significantly boost your final returns.
- Be Patient: Compounding is a long-term game. Avoid withdrawing your investment prematurely to let it grow to its full potential.
- Reinvest Returns: Always ensure that your earnings are reinvested to continue the compounding cycle.
Understanding the Compound Interest Formula
The future value of an investment with compound interest is calculated using a standard formula.
- A = Maturity Amount (Future Value)
- P = Principal Amount (Initial Investment)
- r = Annual Rate of Interest (in decimal)
- n = Number of times interest is compounded per year
- t = Tenure in Years