Simple Interest Formula
Simple interest is calculated using a straightforward three-variable formula:
SI = P × R × T ÷ 100
Simple Interest vs Compound Interest
The critical difference: simple interest calculates interest only on the original principal every period. Compound interest calculates interest on the principal plus all previously accumulated interest — interest earns interest.
Same ₹1,00,000 at 10% for 5 years:
Simple Interest: ₹10,000/year × 5 = ₹50,000 total interest → Final: ₹1,50,000
Compound (annual): Year 1: ₹10,000, Year 2: ₹11,000, Year 3: ₹12,100... → Total: ₹61,051 → Final: ₹1,61,051
The gap widens dramatically over time:
At 10 years: Simple = ₹1,00,000 interest vs Compound = ₹1,59,374 interest
At 20 years: Simple = ₹2,00,000 vs Compound = ₹5,72,750
For investors: compound interest is always preferable — your returns grow exponentially.
For borrowers: simple interest is always preferable — you pay less total interest.
Where Simple Interest is Used
Understanding which financial instruments use simple interest helps you make accurate comparisons:
Short-term personal loans: Many microfinance institutions and money lenders quote simple (flat) interest rates. A ₹20,000 loan at 2% per month flat for 12 months means ₹4,800 total interest regardless of repayment progress.
Treasury Bills (T-Bills): Government short-term securities (91-day, 182-day, 364-day T-Bills) use simple interest for discount calculation. A T-Bill issued at ₹98 and maturing at ₹100 earns simple interest for the holding period.
Vehicle loans quoted as flat rate: Many dealership financing offers quote annual flat rates. These are simple interest on the original loan amount — significantly more expensive than the headline rate suggests when converted to reducing balance.
Post Office Monthly Income Scheme (POMIS): Interest is paid monthly at a simple interest rate on the principal invested.
Informal lending: Loans between individuals and in informal lending markets often use simple interest for its calculation simplicity.
Solving for Unknown Variables
The simple interest formula can be rearranged to find any unknown variable:
Finding the Rate: R = (SI × 100) ÷ (P × T)
Example: ₹60,000 principal, ₹9,000 interest after 2 years. R = (9,000 × 100) ÷ (60,000 × 2) = 7.5% per year
Finding the Principal: P = (SI × 100) ÷ (R × T)
Example: Earned ₹6,000 interest at 8% over 3 years. P = (6,000 × 100) ÷ (8 × 3) = ₹25,000
Finding the Time: T = (SI × 100) ÷ (P × R)
Example: ₹40,000 at 6%, earned ₹4,800 interest. T = (4,800 × 100) ÷ (40,000 × 6) = 2 years
These rearrangements are useful for reverse-calculating the implied interest rate on a loan offer or determining how long it will take to earn a target interest amount.