What is the difference between simple interest and compound interest?

Simple interest is a type of interest calculation that is based on the principal amount of a loan or deposit, the interest rate, and the length of time that the principal will be held. With simple interest, the interest earned is calculated only on the principal amount. So, if you have a principal of Rs.100 and an interest rate of 5% per year, the annual interest would be Rs.5.

Compound interest, on the other hand, is interest that is calculated on the principal amount and on the accumulated interest of a loan or deposit. So, in addition to earning interest on the principal, you also earn interest on the interest that has accumulated over time. This means that the total amount of interest you earn will be greater with compound interest than with simple interest, as the interest is compounded over time.

For example, if you have a principal of  Rs.100 and an annual interest rate of 5%, the total amount of interest earned after one year with simple interest would be  Rs.5. With compound interest, the total amount of interest earned after one year would be greater than  Rs.5, because you would also be earning interest on the interest that has accumulated.