Everything About Non-cumulative Fixed Deposit

Fixed deposits (FDs) are one of the most popular investment choices in India. People often see them as a safe and reliable investment. This is because FDs offer guaranteed returns and come in various timeframes to suit different needs.

Unlike some investments, the interest rate you get with a fixed deposit won't change based on market conditions. This can be appealing to people who prefer predictability. FDs can also help you benefit from compounding, where you earn interest on your interest over time. In this blog, we are taking a closer look at non-cumulative fixed deposits. Without waiting further, let's jump right into it!

What is a Non-cumulative Fixed Deposit?

Non-cumulative fixed deposits offer regular payouts of interest throughout the investment term. Investors can choose how often they receive these payouts, with options like monthly, quarterly, half-yearly, or yearly. Each payout represents the interest earned on the principal amount for that specific period. It's important to remember that these regular payouts reduce the total amount received at maturity because the promised interest is being paid out as you go. Additionally, the interest earned is considered taxable income in the year it's received.

This type of fixed deposit typically has a maturity period ranging from 6 months to 10 years. It's a good option for investors seeking a steady stream of income, such as retirees.

Example:

Let's consider an investor who deposits ₹10,00,000 for 10 years at a 6% annual interest rate. Since it's a non-cumulative deposit, the investor won't benefit from compounding interest. Instead, they'll receive a fixed amount of interest payout based on their chosen frequency (let's say monthly).

Using the formula: Principal Amount x Interest Rate per year x 1/12

The monthly interest payout would be: ₹10,00,000 x 6% x 1/12 = ₹5,000

This translates to a total annual interest of ₹60,000, which will be taxable income in the year it's received.

Features of Non-Cumulative Fixed Deposit

Non-cumulative fixed deposits offer several attractive features such as:

1. Regular Income: As mentioned earlier, non-cumulative FDs offer the benefit of receiving interest payouts at chosen intervals throughout the investment term. This provides a steady flow of income, which can help manage regular expenses.
2. Predictable Returns: The interest rate on non-cumulative FDs is fixed at the time of investment and remains constant throughout the term. This allows for clear and predictable earnings.
3. Flexible Terms: We have already discussed how non-cumulative FDs come in various tenure options, typically ranging from a few months to several years. This flexibility allows investors to choose a term that aligns with their financial goals and need for accessing the principal amount.
4. Simple Calculations: Interest earned on non-cumulative FDs is calculated using a straightforward simple interest formula. This makes it easier for investors to understand how much interest they will receive.

How does a Non-Cumulative Fixed Deposit Work?

Investing in a non-cumulative fixed deposit (FD) is a straightforward process. Here's a breakdown of the steps involved:

1. Opening the Account: You'll need to visit your bank or chosen financial institution. Submit the required documents and deposit the amount you want to invest.
2. Choosing the Term: Decide how long you want your money to be locked into the FD. As mentioned earlier, non-cumulative FD terms can range from a few months to several years, depending on what the bank offers.
3. Setting Up Interest Payouts: This is where you choose how often you want to receive your interest. You can typically choose monthly, quarterly, half-yearly, or annual payouts.
4. Interest Calculation and Payment: The bank calculates the interest earned based on the chosen interest rate and payout frequency. The interest amount is then deposited directly into your linked bank account at the chosen intervals.
5. Maturity: Once the FD reaches its maturity date, you'll receive your initial principal amount back. Interest payouts will also stop at this point.

Documents Required to Open a Non-Cumulative Fixed Deposit

To open a non-cumulative fixed deposit account, you'll usually need to provide some documents to the bank or financial institution. Here's a general list of what they might ask for:

• Proof of Identity: This could be a government-issued ID like an Aadhaar card, passport, or driver's license. It helps them verify who you are.
• Address Proof: Utility bills, bank statements, or similar documents can be used to confirm your residential address.
• Photographs: Some banks might require recent passport-sized photos of yourself.
• PAN Card: This Permanent Account Number is needed for tax purposes when they track the interest you earn on your deposit.

It's always a good idea to double-check with the specific bank you're interested in. Their exact document requirements might differ slightly from this general list.

Frequently Asked Questions

1. How long can I invest in a non-cumulative fixed deposit (FD)?

   Non-cumulative FD terms typically range from 6 months to 10 years. This flexibility allows you to choose a tenure that aligns with your financial goals and need for access to the money.

2. How often can I receive interest payments on a non-cumulative FD?

   Unlike cumulative FDs where interest is compounded and paid at maturity, non-cumulative FDs offer the benefit of regular interest payouts. You can choose to receive interest monthly, quarterly, half-yearly, or annually, depending on your income needs.

3. Is there a penalty for withdrawing money early from a non-cumulative FD?

   Yes, there's usually a penalty for early withdrawal from a non-cumulative FD. Most banks and institutions charge a fee, typically between 0.5% to 1% of the interest earned. However, the specific penalty terms can vary, so be sure to check with your chosen financial institution.