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Cumulative vs Non Cumulative Fixed Deposit

Updated on: 19 Jan 2024 | 10 min read

Fixed Deposit has been India’s most popular investment instrument due to its guaranteed fixed returns at minimal risk. Reasons like tax benefits and ease of investing also contribute to their popularity.
Depending on the nature of the interest payout, FDs are classified into cumulative and non-cumulative. This article will give a detailed comparison between cumulative and non-cumulative FD so you can choose between them according to your financial goals.

What is a Cumulative Fixed Deposit?

The word cumulative means to ‘increase by successive additions.’ In a cumulative fixed deposit, the interest earned on an FD is added back to the principal and reinvested. This means that you will not receive regular interest payouts in Cumulative Fixed Deposits.

Consequently, the next interest payment is calculated on the entire amount, including the principal and the reinvested interest. The reinvestment happens throughout the tenure, and a lump sum amount can be redeemed at maturity. The lump sum, hence, comprises both — the principal and the accumulated interest.

What is a Non-Cumulative Fixed Deposit?

Non-cumulative FDs regularly pay interest to the investors, either monthly, quarterly, half-yearly or annually. As a result, the returns on non-cumulative fixed deposits are not compounded and have a slightly lower effective interest rate.

Difference Between Cumulative and Non-Cumulative FD

Basis	Cumulative Deposit	Non-Cumulative Deposit
Interest Payment	Interest is accumulated and added to the principal amount at regular intervals (usually quarterly or annually).	Interest is paid to the depositor regularly and not added to the principal.
Interest Rate	Higher than the non-cumulative deposit due to the compounding feature	Lower than the cumulative deposit due to the absence of a compounding feature
Compounding Effect	Benefits from the power of compounding, leading to exponential growth over time.	No compounding effect, as interest is not reinvested.
Returns	Higher maturity value due to compounding of interest and re-investment.	Lower maturity value as interest is not reinvested.
Suitability	Ideal for long-term savings goals and wealth accumulation.	Suitable for those seeking regular income or needing access to interest earnings.
Who should invest?	People who do not need a regular income from FD	People who need a regular income

Meaning: A cumulative FD means a fixed deposit where the interest is accumulated and reinvested, and the investor receives a lump sum at maturity. A non-cumulative FD pays interest regularly, and the principal amount is redeemed at maturity.

Example of Cumulative FD

Year	Principal	Interest	Total
Year 1	100000	6500	106500
Year 2	106500	6922.5	113422.5
Year 3	113422.5	7372.463	120795
Year 4	120795	7851.673	128646.6
Year 5	128646.6	8362.031	137008.7

As you can see, if you invest in a cumulative FD, the interest at the end of year 1, Rs. 6500, is reinvested, and the principal for year 2 becomes Rs. 100000 + 6500 = Rs. 106500. At the end of 5 years, you get an amount of Rs. 137009. Of this, Rs. 37009 is your accumulated interest.

Example of Non-cumulative FD

Alternatively, for a non-cumulative FD of Rs. 1 lakh with a tenure of 5 years and an interest rate of 6.5% (annual interest payout), the table of returns will be:

Year	Principal	Interest	Total
Year 1	100000	6500	106500
Year 2	100000	6500	106500
Year 3	100000	6500	106500
Year 4	100000	6500	106500
Year 5	100000	6500	106500

Interest Payout: As you can see, if you invest in a cumulative FD, the interest at the end of year 1, Rs. 6500, is reinvested, and the principal for year 2 becomes Rs. 100000 + 6500 = Rs. 106500. At the end of 5 years, you get an amount of Rs. 137009. Of this, Rs. 37009 is your accumulated interest. Meanwhile, for non-cumulative FD, the interest of Rs.6500 is paid annually to the investor. The total interest amount is Rs. 32500, which happens to be lower than that of a cumulative fixed deposit.
Income Flow: As seen above, a cumulative FD holder does not receive any payment during the tenure of the FD, after which he receives a lump sum. However, a non-cumulative FD holder enjoys a regular income flow throughout the deposit term until maturity. Depending on your unique investment needs, you can also choose the interest payout frequency.
Reinvestment: In the case of a cumulative FD, the interest income is reinvested into the scheme. As a result, the investor earns interest even on his accumulated interest. In non-cumulative FDs, however, the interest is paid out, and the investor only earns interest on the principal they had initially deposited. Consequently, the total returns on a non-cumulative FD are slightly lower than a cumulative FD.
Suitability: Due to its regular income stream, a non-cumulative FD is ideal for someone without a stable income, such as artists, salespeople, freelancers, etc. A cumulative FD, on the other hand, is only suitable for someone who doesn’t depend on the FD for a regular income stream, such as salaried employees, people with stable business profits, etc.

Who should invest in a Cumulative Fixed Deposit?

People not dependent on the return on investments for a regular income stream can invest in a cumulative FD. So, salaried employees and people earning a stable income from their businesses may find cumulative FDs beneficial. Alternatively, you can consider investing in a cumulative FD if you want a lump sum to meet a future goal.

Who should invest in a Non-cumulative Fixed Deposit?

People who do not have a regular income stream, such as retired persons, homemakers who are not working etc., could opt for a non-cumulative fixed deposit to to create a regular income stream and stabilise their finances.

Which is better for you?

Different people have different goals for financial investment. If your goal is to add to your existing regular income, then non-cumulative FD might serve your purpose. But, if you want to multiply your savings, consider the cumulative scheme. You can choose to invest in either of the FDs after conducting due diligence per your flow of income and financial goals.

FAQs

How is cumulative interest credited for fixed deposits?

The periodic interest earned on the cumulative FD is reinvested into the instrument. As a result, the interest keeps earning interest on itself. It is credited as accumulated interest along with the principal amount at maturity.

How is non-cumulative interest credited for fixed deposits?

The periodic interest earned on the deposit in a non-cumulative FD is credited to the investors regularly. Therefore, there is minimal to no compounding of interest in a non-cumulative FD.

What are the benefits of investing in FDs?

The benefits of investing in an FD are

Fixed returns: FDs offer fixed interest rates on the deposit amount. These returns are not linked to market performance or subject to any market fluctuations.
Hassle-free: You can now open an FD account online with a few clicks. Even if you want to book an FD offline, it requires minimal paperwork. You can easily transfer an FD, renew it automatically, and avail a loan against it.
Low Minimum Investment: You can open an FD account with an amount as low as Rs. 1000. This helps people to inculcate an investment habit without investing a large sum.
Balance in your portfolio: Fixed deposits can balance the risk in your portfolio. While instruments such as equities and mutual funds carry risk, FDs are relatively less risky. They are safe investments that provide an assured return over a fixed tenure.

What are the disadvantages of a fixed deposit investment?

The disadvantages of investing in FDs are:

Low-Interest Rate: The interest rate on FDs is usually lower than returns on other market-linked instruments.
Taxation: Interest income from FDs is taxable according to your tax slab. So, the higher your income, the lower your effective FD returns will be.

Is non-cumulative fd taxable?

Yes, interest earned on cumulative and non-cumulative deposits is taxable if your interest income exceeds ₹40,000 from FDs in a given financial year (₹50,000 for senior citizens).