Difference Between Cumulative and Non-Cumulative Fixed Deposits: Which is the Most Suitable for You?
A fixed deposit is one of the most popular investment options in India. Conventionally, it is considered to be the safest and risk-free investment option. These investments promise a fixed return in the form of interest. Generally, people opt for long-term investment options and invest money that they do not expect to use in the near future. On the basis of the payout method, fixed deposits are categorised into two types, cumulative and non-cumulative fixed deposits.
As the name suggests, cumulative fixed deposits are the kind that pays out interest as a lump sum, or cumulatively. On the other hand, non-cumulative fixed deposits are ones that pay out interest regularly, i.e; in fixed frequent intervals.
What is a Cumulative Fixed Deposit?
A cumulative fixed deposit is one where the interest accrued on the invested amount is paid to the beneficiary at the time of maturity of the fixed deposit. The amount is compounded every quarter or every year as per the terms. This means that not only is the investor earning interest on the principal, but they earn interest on the interest from the preceding time periods as well. This compounded interest is added to the principal amount to reach the final maturity amount which is paid to the investor at the end of the tenure.
Let us take an example to understand how cumulative fixed deposit functions. Suppose an individual invests ₹ 10,00,000 for a tenure of 5 years in a cumulative fixed deposit with a bank that pays 6% interest per annum and compounds interest yearly. The below table shows the workings of the interest earned and the balance of the amount after each year. The total interest and the amount paid out to the individual are highlighted at the end of the table, this amount is paid in a lump sum to the individual at the end of the maturity period.
| Year | Balance Amount | Interest for the year | Amount Accrued |
| 1 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| 2 | ₹ 10,60,000 | ₹ 63,600 | ₹ 11,23,600 |
| 3 | ₹ 11,23,600 | ₹ 67,416 | ₹ 11,91,016 |
| 4 | ₹ 11,91,016 | ₹ 71,461 | ₹ 12,62,477 |
| 5 | ₹ 12,62,477 | ₹ 75,749 | ₹ 13,38,226 |
| Total | ₹ 3,38,226 | ₹ 13,38,226 | |
The interest earned for the first year gets added to the balance at the beginning of the next year. The investor then earns interest on this added amount, therefore earning extra interest on the interest from the previous year. The total interest earned during all 5 years amounts to ₹ 3,38,226 and the maturity amount is ₹ 13,38,226. The lump sum amount of interest earned is taxable in the year when it is paid to the individual.
A cumulative fixed deposit is well suited for individuals who are not dependent on interest-earned income. Therefore, individuals with good business revenues or paid workers might choose to make cumulative FD investments. Individuals can also think about investing in cumulative FD if they don't need regular interest and are saving for a future lump sum. Those who can live without frequent interest payments should consider cumulative Fixed Deposits.
What is a Non-Cumulative Fixed Deposit?
The interest that accumulates on a Non-Cumulative Fixed Deposit is paid out annually, half-yearly, quarterly, or monthly. The investor has the option of selecting a payout timescale, and they get a payout of their accrued interest on a regular basis. The amount that is meant to be paid out at maturity keeps declining. This is due to the fixed deposit's predetermined return rate, which is paid out on a regular basis. The interest paid out is taxable as and when it is received by the investor.
The plan offers a maturity period that ranges from six months to ten years. Investors that may be searching for a low but consistent supply of recurrent income, such as retired people, can consider this sort of fixed deposit.
To understand the functioning and computations of a non-cumulative fixed deposit investment, let's use an example. Consider an investor who opens a bank fixed deposit account for ₹ 10,00,000 for a duration of 5 years. The bank offers a 6% annual interest rate on fixed deposits to its investors. Now that it is a non-cumulative fixed deposit, the investor will be able to receive a specific amount of dividend for a predetermined frequency, such as monthly, quarterly, half-yearly, or yearly, rather than being allowed to benefit from compound interest year after year. Let's assume that the investor wants to get paid each year.
| Year | Balance Amount | Interest for the year | Amount Accrued |
| 1 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| 2 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| 3 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| 4 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| 5 | ₹ 10,00,000 | ₹ 60,000 | ₹ 10,60,000 |
| Total | ₹ 3,00,000 | ₹ 10,00,000 | |
The table above shows the calculations for a non-cumulative fixed deposit. The total interest earned per year would amount to ₹ 60,000. The yearly amount of ₹ 60,000 would be taxable for that particular year in the case of a non-cumulative fixed deposit. Over the 5 years a total of ₹ 3,00,000. The interest is not compounded as the earned amount is disbursed to the investor before the next year.
For investors who do not have a consistent income or no income, such as homemakers, those wishing to earn passive income, retirees, freelancers, etc., this sort of fixed deposit, which offers a steady stream of regular income, is a good option. Even though the interest payment received is not a substantial sum, it can surely help in financing the short-term needs of such individuals.
Fixed Deposit Calculator
If you wish to calculate the return on your principal amount, you can always use the help of a fixed deposit calculator online.
The calculation of the effective yield depends on the compounding frequency and the interest rate. Banks in India usually follow the quarterly compounding formula to calculate the fixed income deposits i.e., A= P (1+ r/n) nt.
Here, A is the final amount, P is the principal amount, r is the interest rate, n is the number of times the interest will be compounded and t is the number of years.
You just have to fill in the details of your principal amount, interest rate and deposit period. Upon entering, you will receive the interest, maturity amount and yield.
For example, if you wish to deposit a lakh rupees for a time period of five years at a rate of 8%. Upon entering your information in a fixed deposit calculator, you will receive your desired information i.e., total receivable amount being INR 48, 595, total maturity amount will be INR 1, 48, 595 and the effective yield will be 9.719.
Difference between Cumulative and Non-Cumulative Fixed Deposits
The key differences between cumulative and non-cumulative fixed deposits are explained below:
Frequency of Income
In a cumulative FD, there is no income for the depositor during the tenure of the FD. At the conclusion of the scheme's tenure, the principal and accrued interest are paid in one lump sum. Non-cumulative fixed deposits, on the other hand, provide depositors with a consistent source of income. One can select the frequency of interest payments and benefit from consistent revenue during the deposit period.
Interest Payout
The frequency of interest payouts is what sets cumulative fixed deposits apart from non-cumulative ones. The interest on a cumulative fixed deposit is paid out at maturity, whereas the interest on a non-cumulative fixed deposit is paid out as frequently as the investor chooses. The interest accrued on a cumulative fixed deposit is reinvested and only paid upon maturity. Every three months or once a year, the interest compounds. The interest payment in a non-cumulative fixed deposit, however, is up to the investor. Depending on their requirements, the investor can select the frequency of interest payments. The depositor has the option of choosing interest payments that are made monthly, quarterly, half-yearly, or annually.
Suitability
In comparison to a non-cumulative fixed deposit, a cumulative option yields compound interest and larger returns. A cumulative fixed deposit is an appropriate alternative for a long-term investment for people who want to receive a guaranteed sum at the completion of their investment tenure because the maturity period runs between 6 months and 5 years. There is also the option of a cumulative fixed deposit because not every investor prefers a monthly income. Interestingly, a cumulative fixed deposit is sometimes also referred to as a money multiplier. Therefore, cumulative fixed deposits are suitable for people who are employed or have a steady income.
However, those who want their investments to provide a consistent stream of income can choose a non-cumulative fixed deposit. As a result, the non-cumulative fixed deposit plan is appropriate for retirees, freelancers, homemakers, etc. who may rely on receiving regular interest payments from their assets.
In how many years will my investment double in an FD?
To know the time period in which an investment would double, there is a trick that investors use. It is called the 72 rule, in this, the number 72 is divided by the interest per annum of the fixed deposit and the resulting number is the number of years in which the investment would double. For a 6% yielding fixed deposit, approximately 12 years (72/6) would be required for the investment to double.
What is the minimum age to invest in a fixed deposit?
A fixed deposit can be made in the name of a child as young as one year old, but, it is managed and registered as a dependent account with their guardian or parent. However, an individual can invest in a fixed deposit if they are above the age of 18 years.
Are the interest earnings on an FD taxed?
Yes, the earnings from interest on a fixed deposit are taxed according to the year in which the interest is paid out. However, there are certain tax-saving fixed deposit schemes available in the market which help investors in saving taxes on interest earned.