Effective Interest Rate Calculator
Two accounts can both advertise 7% and pay you differently, because interest credited monthly or quarterly earns interest on interest inside the same year. The effective annual rate normalises every quote onto one scale, which makes it the fair number for comparing FDs, savings accounts and loans. This page converts a nominal rate into its effective counterpart and prices the difference in rupees on your balance.
Enter values
Results
- Effective annual rate
- 7.23%
- Interest earned in a year
- ₹7,229.01
- Extra over the advertised rate
- ₹229.01
How is the Effective Interest Rate calculated?
Enter the advertised annual rate, choose how often interest is compounded — yearly, half-yearly, quarterly, monthly or daily — and the balance sitting in the account. The calculator raises one plus the periodic rate to the power of the yearly periods, converts that to a percentage, then applies it to your balance to show the year's interest and the extra rupees compounding added over the headline rate.
Formula
EAR = ((1 + r ÷ n)^n − 1) × 100, where r is the nominal annual rate as a decimal and n is the number of compounding periods per year. Extra interest = balance × (EAR − r). When n is 1 the formula collapses to the advertised rate, so yearly compounding is the only case where the two numbers agree.
Example
A savings account quotes 7% and credits interest monthly. EAR = (1 + 0.07 ÷ 12)^12 − 1 = 7.229%, so ₹1,00,000 earns ₹7,229.01 over a year instead of the ₹7,000 the headline suggests — ₹229.01 extra from compounding alone. Move the same 7% to half-yearly credit and the effective rate settles at 7.12%.
Things to remember
Always convert before comparing. A 7% account compounding monthly delivers an effective 7.23%, which beats a 7.10% account credited once a year despite the lower advertised figure. The logic reverses for borrowers: at the same nominal rate, more frequent compounding raises what you repay.
Frequently Asked Questions
What is the difference between nominal and effective rate?
The nominal rate is the figure printed on the brochure, before compounding is counted; the effective rate includes interest earned on interest within the year. A nominal 7% compounded monthly is effectively 7.23%, and the gap widens as either the rate or the frequency rises.
How do I convert a monthly rate to an annual one?
Compound it instead of multiplying by twelve. A monthly rate of 0.5833% (7% ÷ 12) becomes (1 + 0.005833)^12 − 1 = 7.229% a year. Simply multiplying 0.5833% by 12 gives 7%, which understates what the balance actually earns.
Which compounding frequency pays the most?
For a saver, more frequent is always better: daily beats monthly, which beats quarterly, which beats yearly. The gains shrink fast, though — at 7%, moving from yearly credit to daily adds only about 0.25 percentage points of effective return.
Do banks in India quote effective interest rates?
Deposit rates are advertised as nominal, with interest usually compounded quarterly, so ask for the effective yield when two FDs look equally matched. Loan EMIs already use a monthly reducing balance, which behaves like monthly compounding on the outstanding amount.
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