Interest accrues on the original principal for the whole term and is not added to it.
Total amount
₹1,50,000
- Interest
- ₹50,000
- Compound would give
- ₹1,61,051
₹11,051 more, compounded yearly
The formula
I = P × R × T ÷ 100, and the total amount is P + I. Nothing compounds: ₹1 lakh at 10% earns exactly ₹10,000 in year one, year five and year thirty.
That flatness is the entire difference from compound interest, and over long terms it is enormous. Twenty years at 10% simple triples your money; twenty years at 10% compounded multiplies it by nearly seven.
Where simple interest is actually used
Most consumer products in India compound, so simple interest turns up less than the textbooks suggest. It still appears in short-term personal and vehicle loans quoted at a 'flat rate', in some informal lending, and in the interest component of certain fixed-tenure instruments.
The flat-rate loan is the one to watch. A car loan advertised at '6% flat' is not a 6% loan — because you repay the principal monthly but pay interest on the whole original amount throughout, the true reducing-balance rate is roughly double. If you are comparing a flat quote against an EMI quote, the EMI calculator is the honest comparison.
Common questions
Effectively yes, and it is why flat-rate loans are misleading. Interest is charged on the full original amount for the whole tenure even though you have been repaying principal all along, so the effective rate is close to double the quoted one.
Related calculators
Compound interest
Interest on the interest. Choose how often it compounds and see what the difference is worth over the term.
EMI
Home, car and personal loan EMI on the reducing balance, with every instalment of the schedule.
Fixed deposit
What a fixed deposit is worth at maturity, compounded quarterly the way banks actually post it.