Consider a fixed deposit of Rs 1 lakh made for3 years where the interest rate is 8 per cent.
In the first year the interest earned is Rs 8,000 and the deposit is now worth Rs 1,08,000
In the second year the interest comes to Rs 8,640 which is 8 per cent of Rs 1,08,000 and not the initial investment of Rs 1 lakh
In the third year the interest now becomes Rs 9,331 which is 8 per cent of Rs 1,16,640
At the time of maturity the deposit pays Rs 125,971