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Updated on: 09 Jan 2024 | 10 min read
Fixed deposits (FD) are prevalent investment instruments. The fixed and predictable returns, the flexibility in choosing the duration, and the feasible investment amount make FDs a much sought-after savings scheme. Moreover, banks, deposit-taking non-banking financial companies (NBFCs), and post offices offer a range of fixed deposit schemes to suit the varied needs of different investors. If you are a risk-averse investor, consider investing in fixed deposit schemes.
Depending on the payout of the interest amount, fixed deposits are categorised into cumulative and non-cumulative FDs. These schemes differ in interest payments even though the interest rates may be the same. You can invest in any of these schemes based on your financial goals. Here is a complete breakdown of what a cumulative FD means.
A Cumulative FD is a scheme wherein the interest on your investment accumulates during the deposit tenure. The interest is compounded annually or quarterly, depending on your preferred scheme. It means that the earned interest is reinvested in the FD account—interest gets added to the principal amount—and the subsequent interest is then calculated on the aggregate amount. The accrued interest is paid along with the principal amount on maturity. Cumulative FDs are best suited for investors who do not need a regular income and want to create a substantial deposit over a longer term.
Example of Cumulative FD
Suppose you open a cumulative fixed deposit account with a bank and deposit Rs. 1 lakh for six years at an interest rate of 6.5% compounded annually. In this case, here’s how the interest would accumulate over the deposit period:
| Year | Investment Value | Amount of Interest | Amount at the year-end |
|---|---|---|---|
| 1 | Rs. 1,00,000 | Rs. 6,500 | Rs. 1,06,500 |
| 2 | Rs. 1,06,500 | Rs. 6,922 | Rs. 1,13,422 |
| 3 | Rs. 1,13,422 | Rs. 7,372 | Rs. 1,20,795 |
| 4 | Rs. 1,20,795 | Rs. 7,851 | Rs. 1,28,646 |
| 5 | Rs. 1,28,646 | Rs. 8,362 | Rs. 1,37,008 |
| 6 | Rs. 1,37,008 | Rs. 8,906 | Rs. 1,45,914 |
The calculation above shows how interest earned on the FD is added to the previous principal amount each year. Every year, interest is calculated on both the principal and the accumulated interest. The total interest that you earn on the FD is Rs. 45,913. It will be credited to your account in a lump sum at the end of 6 years, along with the principal amount.
Cumulative FDs are ideal for those individuals who do not want to receive regular interest income but want to benefit from compounding. If you want capital appreciation, cumulative Fixed Deposits are for you.
The interest rate on cumulative fixed deposits depends on the financial institution. Here are the interest rates on cumulative FDs offered by a few banks/NBFCs for deposits below Rs. 2 crores:
| Bank Names | Regular Interest Rates | Interest Rates for Senior Citizens |
|---|---|---|
| Axis Bank | 2.75% to 5.75% | 2.75% to 6.50% |
| Bajaj Finance | 6.55% to 7.40% | 6.80% to 7.65% |
| ICICI Bank | 3.00% to 6.35% | 3.50% to 6.85% |
| HDFC Bank | 3.00% to 6.20% | 3.50% to 6.95% |
| SBI Bank | 3.00% to 6.10% | 3.50% to 6.90% |
(Note: The interest rates are sourced from the official websites of the banks/ NBFC mentioned in the table.)
In a non-cumulative fixed deposit scheme, the interest earned is regularly paid to the depositor, typically at intervals ranging from monthly to quarterly and semi-annually.
This type of FD ensures a steady return for investors since the bank doesn't withhold the interest. However, it offers lower interest rates compared to cumulative FD, as the power of compounding is not fully utilised.
The following table shows the difference between cumulative and non-cumulative FDs:
| Points of difference | Cumulative fixed deposits | Non-cumulative fixed deposit |
|---|---|---|
| Meaning | Under this scheme, the interest is compounded and accumulated throughout the term of the FD, and paid along with the principal at the maturity of the FD. | Under this scheme, interest is paid periodically to investors monthly, quarterly, half-yearly or yearly. Only the principal amount is paid on maturity. |
| The flow of income | There is no regular income flow. The interest accrued along with the principal is paid at maturity. | A steady flow of income. |
| Suitable for | Cumulative fixed deposits are ideal for individuals not dependent on a regular interest income and who want to receive a lump sum fund at the end of their tenure to meet a specific goal. | Non-cumulative fixed deposits are suitable for investors looking for a regular source of income. For example, pensioners or retirees needing a steady flow of income can opt for these. |
| Returns earned | The adequate returns on cumulative fixed deposit schemes are higher than non-cumulative fixed deposits. The reason is simple: under these schemes, you earn interest on the interest you have already earned. Hence, the overall interest earned during the term is higher. | The returns of non-cumulative fixed deposit schemes are lower than cumulative deposits. This is because there is no compounding; you earn interest on the principal amount only, not on the previously earned interest values. |
Furthermore, many financial institutions have different interest rates for cumulative and non-cumulative fixed deposit schemes. It is best to check the interest rates before you invest.
A Cumulative FD is also known as a money multiplier scheme, as the interest gets compounded until maturity. This type of FD is ideal for people not looking to earn regular interest or have a steady income from investment. If you want to save for a particular goal and earn reasonable returns on your investment, consider opting for a cumulative fixed deposit.
When opting for a fixed deposit scheme, remember that cumulative FD will create a lump sum corpus on maturity. In contrast, non-cumulative FD will make a regular and guaranteed income stream throughout the deposit tenure. It ultimately boils down to your requirements and financial goals.
Many financial institutions offer cumulative fixed deposit schemes. To determine the best, compare the interest rates offered. The best scheme would be the one that provides the highest interest rate to earn the maximum possible returns. Also, compare the minimum investment amount, compounding frequency and the available deposit terms. Ensure that the deposit meets your financial needs.
You can get tax deductions through your investment in a 5-year tax-saving FD (cumulative and non-cumulative). You can claim a deduction of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961.
The minimum investment amount depends on the financial institution. Different institutions have different requirements. Some financial institutions might require a minimum deposit of Rs.1,000; others may ask for a minimum deposit of over Rs. 5,000. As far as the maximum amount is concerned, there is usually no limit.
The minimum and maximum tenure depends on the financial institution. However, in the case of banks, the minimum and maximum tenures usually range between seven days to 10 years.
Yes, TDS is payable on your cumulative FD interest income if it exceeds Rs.40,000 in a financial year. For senior citizens, the TDS limit is Rs.50,000. Interest income below these limits does not attract TDS. However, if you have not intimated your Permanent Account Number (PAN) details to the bank, then the TDS rate is 20%. TDS is deducted on FD at the time of credit of interest and not at maturity.
If your overall income is below the limit of Rs. 2.5 lakh, you can submit Form 15G/H to the financial institution to avoid a TDS deduction on the FD interest income.
Cumulative FDs are a good investment avenue for investors willing to benefit from compounding rather than receiving regular interest income.
Cumulative FD interest is credited to the FD account over time and paid to the investor on maturity.
Interest in a Non-Cumulative fixed deposit is regularly credited to the FD account and paid out at the end of each period, according to the investor's preference.
Interest is compounded annually and paid out at maturity for cumulative fixed deposits. However, non-cumulative fixed deposits provide the flexibility of monthly, quarterly, half-yearly, or annual interest payouts based on your preferences.
