Fixed deposits are widely favoured by investors in India for their reliability and security. These investments offer a fixed return through interest rates. Usually, investors opt for long-term options, parking funds they don't need shortly. Fixed deposits are divided into 2 types based on payout method: cumulative and non-cumulative FD. Let's learn about the difference between cumulative and non-cumulative fd in detail.
What Is Cumulative FD?
A cumulative fixed deposit is a type of investment where the interest earned on the principal amount is reinvested and paid out at the end of the deposit term. The interest is compounded either annually or quarterly based on the agreed terms. This means that not only does the investor earn interest on the initial principal, but they also earn interest on the accumulated interest from previous periods. The compounded interest is then added to the principal amount, resulting in the final maturity amount paid to the investor upon maturity.
Let's illustrate this with an example. Consider an individual who invests ₹ 10,00,000 for a 5-year tenure in a cumulative fixed deposit with a bank offering 6% interest per annum, compounded annually. The table below demonstrates the interest earned and the balance of the deposit after each year, with the total interest and final payout highlighted at the end. This total payout, comprising both principal and accumulated interest, is disbursed as a lump sum to the investor upon maturity.
| Year | Beginning Balance | Interest Earned | Ending Balance |
| 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 |
Each year, the interest earned is added to the principal amount at the beginning of the subsequent year. Consequently, the investor earns interest on this combined sum, thereby accruing additional interest on the interest from previous years. In this example, the total interest earned over the 5-year period amounts to ₹ 3,38,226, with a maturity amount of ₹ 13,38,226. It's worth noting that the lump sum interest earned is subject to taxation in the year it is paid out to the individual.
Cumulative fixed deposits are particularly suitable for individuals who do not rely on interest income as their primary source of funds. Hence, individuals with stable business revenues or salaried employees may opt for cumulative FD investments. Additionally, those who are saving for a future lump sum and do not require regular interest payments can consider investing in cumulative fixed deposits. This strategy is ideal for individuals who can forgo frequent interest disbursements in favour of a larger payout at maturity.
What Is Non- Cumulative FD?
Non-cumulative fixed deposits offer investors the flexibility to receive interest payouts periodically, whether annually, semi-annually, quarterly, or monthly. This payout frequency is chosen by the investor and ensures a regular income stream based on the accrued interest. Over time, the payout amount decreases as the fixed deposit's predetermined interest rate is disbursed regularly. It's important to note that the interest earned is subject to taxation upon receipt.
These fixed deposits typically have maturity periods ranging from six months to ten years, catering to investors seeking stable, recurring income sources, such as retirees or those with a preference for steady returns.
To illustrate how a non-cumulative fixed deposit works, let's consider an investor depositing ₹10,00,000 for a five-year duration at a bank offering a 6% annual interest rate on fixed deposits. In this scenario, the investor opts for yearly payouts.
| Year | Opening Balance (₹) | Interest Earned (₹) | Closing Balance (₹) |
| 1 | 1,000,000 | 60,000 | 1,060,000 |
| 2 | 1,060,000 | 60,000 | 1,120,000 |
| 3 | 1,120,000 | 60,000 | 1,180,000 |
| 4 | 1,180,000 | 60,000 | 1,240,000 |
| 5 | 1,240,000 | 60,000 | 1,300,000 |
The table provided outlines the calculations for this non-cumulative fixed deposit. The investor would receive ₹60,000 in interest annually, totalling ₹3,00,000 over the five-year period. It's worth noting that this interest is taxed in the year it is received, as it is not compounded but disbursed to the investor before the next interest accrual period.
Non-cumulative fixed deposits are particularly suitable for individuals with irregular or no income sources, such as homemakers, freelancers, retirees, and others seeking passive income streams. While the interest payouts may not be substantial, they can effectively supplement short-term financial needs, offering a reliable source of income over the deposit's duration.
What's the Difference Between Cumulative and Non-Cumulative FD?
Cumulative fixed deposits pay interest in a lump sum, accumulating over time. On the other hand, non-cumulative fixed deposits pay interest at regular intervals, providing a steady income stream.
Cumulative Vs Non-Cumulative FD
| Particulars | Cumulative Fixed Deposit (FD) | Non-Cumulative FD |
| Definition | In cumulative FDs, interest is compounded over the entire tenure, adding to the principal amount. | Non-cumulative FDs do not compound interest; instead, interest is paid out periodically. |
| Interest Payout | Interest is received as a lump sum upon maturity of the FD. | Interest is disbursed at regular intervals, such as monthly, quarterly, half-yearly, or yearly. |
| Income Flow | During the tenure, no income is generated as interest is reinvested. | Non-cumulative FDs provide a steady income stream throughout the tenure. |
| Reinvestment | Cumulative FDs offer reinvestment of interest, leading to higher overall returns due to compounding. | Non-cumulative FDs do not allow reinvestment since interest is paid out regularly. |
| Impact on Returns | Cumulative FDs result in higher total interest earnings due to compounding. | Non-cumulative FDs may yield slightly lower total interest as interest payments are disbursed periodically. |
| Suitable for | Cumulative FDs are suitable for individuals with stable incomes who can afford to reinvest their interest for higher returns. | Non-cumulative FDs are preferred by retirees, housewives, and freelancers who rely on regular income streams for expenses. |
Cumulative vs Non-Cumulative FD: Which is Better?
Both cumulative and non-cumulative fixed deposits (FDs) are solid choices for saving money. Your decision between the two depends on what you prefer and your financial goals. If you want to save up for something in the short or long term, go for the cumulative FD. But if you need money regularly for everyday expenses, the non-cumulative FD is better.
Just remember, with a Cumulative FD, you'll earn more interest over time because it compounds, but you won't get the interest until the end of the term. On the other hand, Non-Cumulative FDs pay out interest regularly, giving you a steady income.
Closing Thoughts
Now that you understand the advantages of both cumulative and non-cumulative fixed deposits, you can choose the option that best suits your financial goals. Here at Freo, we offer competitive interest rates on both types of FDs, helping you maximize your returns. Whether you're looking to grow your savings for a long-term goal or need a steady stream of income, Freo has the perfect FD solution for you.
Grow your savings effortlessly with Freo's Fixed Deposits! Open an account from the comfort of your home and transfer funds directly from your Savings Account. Freo offers some of the most competitive FD interest rates in the market, helping you maximize your returns. Don't wait - start building your future today!
