Cumulative vs Non-cumulative FD

Cumulative vs Non-cumulative FD

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Comparing Cumulative FD vs Non-cumulative FD – How are the two savings instruments different?

Key Takeaways

  • Fixed deposits are of two types – cumulative and non-cumulative
  • Cumulative FDs are those where you earn interest on maturity
  • They are ideal for people looking to create a corpus and make compounding benefits
  • With Non-cumulative FDs, you can choose your preferred interest payout method – monthly, quarterly, etc.
  • Non-cumulative FDs are excellent for people who need extra income on their regular income sources

Introduction

Fixed deposits are savings instruments that allow you to create wealth gradually. Instead of leaving your excess money in your savings account, you can consider opening a fixed deposit. This way, you are not tempted to use up your savings and can even earn interest on the money fixed. Fixed deposits also provide a higher rate of interest than a savings account. Banks typically allow you to open two types of fixed deposits – cumulative and non-cumulative. Read on to know more about cumulative vs non-cumulative FDs.

What is a Cumulative FD?

A cumulative FD is one in which the interest is compounded and paid with the deposit at the time of maturity. Since the interest accrued on the cumulative fixed deposit is reinvested, you benefit from compounded returns, leading to creating a lump sum amount at the end of the FD tenure. It is an ideal investment option for people looking to build a corpus instead of earning regular interest payments.

For instance, if you invest INR 100,000 for one year in a cumulative FD at an 8% interest rate, your interest income at the time of maturity will be INR 8234, which is an absolute return of 8.24%.

Who should invest in a cumulative FD?

A cumulative FD is an excellent investment option for salaried individuals, earning a steady monthly income. It is also an ideal option for people whose aim is to build a larger corpus (also known as capital appreciation) instead of earning extra monthly or quarterly income in the form of interest payout.

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What is a non-cumulative FD?

A non-cumulative FD is the type of investment that provides you with the flexibility of earning a regular interest payout. Interest on non-cumulative FDs is typically paid on a monthly, quarterly, half-yearly, or annual basis. You have to select your preferred payment mode at the time of the application. You also have the option to choose the frequency of the pay-out.

Let us say you decide to invest INR 100,000 at an interest rate of 8% p.a. opting for a monthly payout. In this case, your monthly interest income will be INR 666.66 (8% of 100,000/12), while the total annual income from the FD will be INR 8,000.

Who should invest in a non-cumulative FD?

Non-cumulative FDs are an attractive option for those who do not have a fixed source of income. Retirees, homemakers, small business people, etc., can deposit a lump-sum amount and benefit from this investment option. The periodic interest can fund their regular expenditure and help them get a steady source of income.

Cumulative FD vs non-cumulative FD: What is the difference?

Let us now compare cumulative vs non-cumulative FDs based on several crucial factors. They are as under:

Interest payout

The interest is paid along with the principal at the time of maturity in a cumulative FD. But, in a non-cumulative FD, there is an option to get the interest at a fixed interval of time –monthly, quarterly, half-yearly, or annually.

Tax implications

In cumulative FDs, TDS (Tax Deducted at Source) is deducted automatically when the interest is over and above the limit as per the tax laws. If you are not eligible for TDS, you have to submit a duly filled Form 15G/15H. Also, if you are looking to reduce your tax outgo, there are some tax-saving cumulative FDs (5-year FDs) that you can consider. The interest earned on non-cumulative FD is taxable according to one’s income tax slab.

Interest treatment

Another point of comparison in cumulative FD vs non-cumulative FD surrounds the treatment of interest. In a cumulative FD, the interest is compounded, and you earn interest on interest. Therefore, the interest earned at the time of FD maturity is higher than non-cumulative FDs. There is no option of reinvestment in non-cumulative FDs because the interest is paid at regular intervals.

Suitability

A cumulative FD is suitable for individuals with fixed income sources that allow them to manage their finances without relying on FD interest and salaried individuals. A non-cumulative FD is ideal for pensioners, retired people, and those who do not have any regular income sources and need a steady income to fulfil their daily needs.

Cumulative vs non-cumulative FD: which is better for you?

Both cumulative and non-cumulative Fixed Deposits are excellent savings options. They are also safe investments. As for which FD is better for you, it depends on your financial circumstances and your needs. For instance, you could be a salaried employee, but your income may not be sufficient to pay for your monthly expenses. In such a case, you can get an extra source of income through the FD. On the other hand, if you have surplus savings, you can consider putting them away in a non-cumulative FD. Similarly, retired people who have sufficient savings may create cumulative FDs to build a larger corpus r earn more monthly income by creating non-cumulative FDs.

Conclusion

Irrespective of whether you opt for cumulative FD vs non-cumulative FD, a fixed deposit is an excellent investment option. It is also one of the safest investment vehicles as it generates guaranteed returns. Today, you can open these FDs online in a matter of minutes simply by filling a form and choosing your preferred investment amount, tenure, and type of FD.

If you prefer to save time and effort and open an FD account remotely, download the digibank by DBS app right away!

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Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.

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