Cumulative vs Non-Cumulative Fixed Deposit: Overview

Cumulative vs Non-Cumulative

Indeed, Fixed Deposits have always been reliable instruments for keeping your savings safe during uneasy times, because people invest from their years of hard work. Many banks have FDS with different features and terms from which one can choose. Two popular types of FDS are the Cumulative Fixed Deposit and Non-Cumulative Fixed Deposit. They have their features, benefits, and downfalls. So, let’s dive into FDS to see how these two compare and help you choose.

What is a Fixed Deposit?

However, before that, let’s have a brief understanding of FD. FD is, by definition, a low-risk investment from banks or other financial institutions; you deposit money in lumps for a certain period, and you will receive some interest on your deposits. Unlike previously stated, the main benefits of FDS are their safety (as in some cases they are insured by the government) and guaranteed returns. 

Now, let’s go ahead and analyse the Cumulative Fixed Deposit and the Non-Cumulative Fixed Deposit in detail. 

Cumulative Fixed Deposit (FD)

This type of Cumulative Fixed Deposit is where interest from the deposits will be compounded at certain intervals, but will not be paid until the maturity of the FD. The interest accrued will thus be added to the principal, and the whole amount will grow over the specified period. 

For instance, ₹1,00,000 invested at 6% compounded annually for 5 years in a cumulative FD will grow to approximately ₹1,33,823 at maturity. The interest will be calculated on the principal, and at regular intervals, will be combined with the total amount to provide a figure that the customer can withdraw at the end of the tenure. Thus, interest will be earned on interest.

Non-Cumulative Fixed Deposit (FD)

On the other hand, a Non-Cumulative Fixed Deposit pays the interest amount at regular intervals, such as monthly, quarterly, or annually. You do not have to wait for the maturity of the fixed deposit here to get interest. You can take it at regular intervals, unlike it being a source of regular income. 

Suppose you invest ₹1,00,000 in a Non-Cumulative Fixed Deposit at 6% interest for 5 years; the interest amount (₹6,000 annually) will be received by you as per the payout frequency selected by you. This option is meant for those who desire a regular outflow of cash.

Cumulative vs Non-Cumulative FD: Key Differences

Having discussed the broad distinction between the two kinds of fixed deposits, it is now time to delve into a more detailed discussion. 

Cumulative vs Non-Cumulative fixed deposit comparison. 

1. Interest Payout Options: 

• Cumulative Fixed Deposit: No returns during the period of investment, as interest is compounded and grows for maturity payout. 
• Non-Cumulative Fixed Deposit: Offers interest payout at definite regular periods such as monthly, quarterly, or annually, depending on preferences. 

2. Best FD for Wealth Accumulation: 

• A Cumulative Fixed Deposit is said to be best suited for creating wealth. As interest earned is reinvested further and then compounded, your investment earns scale over time.
• Since the interest is paid out regularly and not reinvested, non-cumulative FDs do not benefit from compounding.

3. Regular Income:

• Non-Cumulative Fixed Deposit is the right instrument for one-to-one regular income. The periodic payouts enable continuous cash flow, making this instrument a good choice for any retiree or people who need regular income.

4. Interest Compounding:

• A Cumulative Fixed Deposit earns the FD interest on a compounding basis. Since interest is reinvested, the principal amount grows at an accelerated rate.
• On the other hand, a Non-Cumulative Fixed Deposit pays interest on a non-compounding basis. It pays out the interest as income, with the principal remaining static, as the payouts are made to the customers regularly.

5. FD Maturity Options:

• In both cases, Cumulative and Non-Cumulative Fixed Deposit (an FD has a maturity date, and after such a date, you can either withdraw the entire principal and interest or reinvest the same. However, in the case of a cumulative FD, the entire amount is paid to you at maturity, while a non-cumulative FD pays the interest at periodic intervals.

Fixed Deposit Interest Payout Frequency

Cumulative vs Non-Cumulative FDS: One has to consider the frequency of interest payments to choose a suitable one. In detail, what it actually means is:

• Monthly Interest FD: This is a Non-Cumulative FD. The investors get the interest on a monthly basis. It is usually chosen by retirees or people who wish to have a steady income.
• Quarterly Interest FD:  interest may be compounded quarterly, but is not paid out until maturity. Quarterly interest payouts apply only to non-cumulative FDs

Tax Implications of FD Interest

Interest on Cumulative and Non-Cumulative Fixed Deposits attracts tax. It works this way: 

• Tax on Interest: The interest on both Cumulative and Non-Cumulative FDS is subject to income taxation. If the interest credited exceeds ₹40,000 (or ₹50,000 for senior citizens) in a financial year, the bank typically deducts TDS or Tax Deducted at Source. The TDS rate is 10% if you do not provide PAN, it will be increased to 20%.
• Interest Reinvestment: The interest on a Cumulative Fixed Deposit is also taxed on an accrual basis. Hence, even if the interest is being reinvested, you will still have to include interest earned in the tax you pay every year, which implies that you must pay tax on interest even if you have not withdrawn it. 
• Taxable Income of Non-Cumulative FDS: Non-Cumulative Fixed Deposit interest is distributed from time to time, and you have to add the interest received to your taxable income for every year.

Senior Citizen FD Options

Because you are a senior citizen, you get an additional higher interest margin rate from banks. Senior citizens enjoy this facility to get about 0.25%-0.5% more on FD actual interest compared to those who are not senior citizens. You can either choose the Cumulative or Non-Cumulative FD depending on your needs. Senior Citizen FD scheme is best for those who want to have some regular income and at the same time are looking for wealth building.

FD Laddering Strategy

FD laddering is a popular method for arranging Fixed Deposit investment planning. In this strategy, the investments are made in FDS having different maturity periods. This ensures regular liquidity for you and, at the same time, for long-term compounding benefits. For example, you can have some money in a Cumulative Fixed Deposit for long-term wealth accumulation and other portions in Non-Cumulative FDS for regular income.

Premature Withdrawal Rules

Whichever option you choose, be it a Cumulative or Non-Cumulative FD, it is very important to understand the premature withdrawal rules. Generally, with the premature withdrawal of the FD, the penalty will be reflected as a deduction in the interest earned. The penalty varies from 0.5% to 1% of the interest rate applicable to such premature withdrawals. However, in case of emergencies, you are free to apply for withdrawals. 

FD Nomination Process

It is important to fill out the FD nomination process, which will ensure that your FD goes to the right person in the event of your demise. This is the process of a nominee designated to receive the FD proceeds in case of any unfortunate event. It is simple and can be updated at any time. 

Auto-Renewal Feature

The Cumulative and Non-Cumulative Fixed Deposits generally provide you with the feature of the auto-renewal facility, which means that in case you do not withdraw the FD after the maturity date, it will be automatically renewed. This saves the hassle of renewal and allows you to enjoy those savings, earning interest all the while, while not needing to take action on the renewal process.

Conclusion

Selecting a Cumulative Fixed Deposit or a Non-Cumulative Fixed Deposit will entirely depend on the applicant’s requirements. Aiming solely at wealth accumulation, one may choose to go for a Cumulative Fixed Deposit if the interest is not needed until maturity. On the other hand, if one expects periodic income from the FD, then the most suitable option would be Non-Cumulative Fixed Deposits.

For choosing the best option based on individual monetary expectations, some of the factors are interest reinvestment, the compounding interest rate, and the payout frequency of the Fixed Deposit schemes. It all depends on asking whether one wants to maximise wealth or needs a good FD for regular income: The selection should always depend on one’s financial aims.

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.