The simple interest formula calculates interest earned or charged on a principal amount, using a flat rate applied only to the original sum — never to any interest that has already accrued. It's the most basic interest calculation, and the natural starting point for understanding how compound interest differs.
Formula
SI = P × R × T / 100
| Variable | Meaning |
|---|---|
| SI | Simple interest earned or owed |
| P | Principal (original amount) |
| R | Annual interest rate (%) |
| T | Time period in years |
To find the total amount: Total Amount = P + SI
Worked Example
₹1,00,000 invested at 8% annual simple interest for 5 years:
- SI = 1,00,000 × 8 × 5 / 100 = ₹40,000
- Total Amount = 1,00,000 + 40,000 = ₹1,40,000
Compare that to the same ₹1,00,000 at 8% compounded quarterly for 5 years, which produces ₹1,48,595 — see the Compound Interest Formula for that worked example. The extra ₹8,595 in the compound case comes entirely from interest earning interest each quarter, an effect simple interest never captures.
Key Things to Know
- Simple interest grows in a straight line, adding exactly the same rupee amount of interest every year, since it's always calculated on the unchanging original principal — ₹8,000 interest in year 1 is identical to ₹8,000 interest in year 5 in the example above.
- The formula assumes a single, unchanging rate for the entire period. If the rate changes partway through, the calculation needs to be split into separate periods and summed rather than applied in one step.
- Simple interest always understates growth compared to compound interest over any period longer than one compounding cycle — see Simple vs Compound Interest for a full side-by-side comparison of when each applies.
- This formula is symmetric for loans and investments. The same SI = P × R × T / 100 calculates interest you earn on a deposit or interest you owe on a loan — only the direction of the cash flow differs, not the maths.