Compound interest is earning interest not just on the original amount but on accumulated interest from previous years. For example, if you deposit ₹1,000 at 6% annual interest, after one year you have ₹1,060. In the second year, you earn interest on ₹1,060, not just ₹1,000, giving you ₹1,123.60. This compounding process helps money grow exponentially over time, turning small savings into substantial amounts.