What is simple interest?
Simple interest is calculated only on the original principal — it never compounds on interest already earned or charged. It's the simplest possible interest calculation, and it's what several real Indian financial products actually use, even though most savings and loan products around you use compound interest instead.
Formula and worked example
Simple Interest = (Principal × Rate × Time) / 100
Where Principal is the amount borrowed or deposited, Rate is the annual interest rate (as a percentage), and Time is the duration in years.
Example: ₹1,00,000 principal at 10% p.a. for 2 years: Simple Interest = (1,00,000 × 10 × 2) / 100 = ₹20,000 Total repayable = ₹1,20,000 — flat, regardless of how or when you repay the principal.
Flat rate vs reducing balance: the gap that costs borrowers money
This is the single most important thing to understand about simple interest in India. A flat rate loan charges simple interest on the original principal for the whole tenure — even after you've repaid part of it in EMIs. A reducing balance loan charges interest only on what you still owe, which shrinks every month.
A loan advertised at "10% flat rate" is not the same as "10% p.a." on a reducing balance basis — its effective rate works out closer to 18-19%. Lenders and NBFCs sometimes lead with the flat rate because it looks lower. Always ask explicitly which basis a quoted rate uses before comparing two loan offers.
Where simple interest actually shows up in India
- Gold loans — most NBFCs and banks charge simple interest on the pledged loan amount, often with bullet repayment (pay interest monthly, principal at the end)
- Flat-rate personal and consumer durable loans — common with dealer-financed purchases; check the reducing-balance equivalent before signing
- GST late payment interest (Section 50, CGST Act) — charged at 18% p.a. simple interest, calculated per day from the due date until actual payment, with no grace period
GST late payment: a concrete example
If you owe ₹50,000 in GST and pay 15 days after the due date: Interest = 50,000 × 18% × (15/365) ≈ ₹370
It scales linearly with both the amount and the delay — on a larger outstanding balance held for a full month, this adds up fast. Filing on time is materially cheaper than the interest cost of delay.