Difference between Cumulative and Non Cumulative Fixed Deposit

  • Deposit
  • 18 Days ago

Written by - Shriram

Being one of India's safest and most popular investment option, a fixed deposit  offers guaranteed returns in the form of interest. A Fixed Deposit is categorised into a cumulative and a non-cumulative fixed deposit depending on the interest payout frequency. In a cumulative fixed deposit, the investor gets interest as a lump sum at the end of maturity. On the other hand, in a non-cumulative fixed deposit, interest is regularly paid to the investor. This article shares with you the differences between cumulative vs non-cumulative fixed deposits in detail, helping you decide which one is right for you.

What is a Cumulative Fixed Deposit?

A cumulative fixed deposit accumulates the interest amount until maturity and the interest is compounded every quarter or every year. The interest that is earned every year is added to the principal amount and is paid along with the principal amount at the end of the tenure. 
The tenure of cumulative fixed deposit ranges between 6 months and five years. This type of fixed deposit is ideal for investors who do not depend on a regular income. 
Let us understand the concept better with an example. 
If a depositor starts a fixed deposit of ₹1,00,000 for a tenure of 5 years with the interest of 7% p.a. the interest earned is shown below: 
 
Year Deposit Interest earned Total amount
1 ₹1,00,000 ₹7,000 ₹1,07,000
2 ₹1,07,000 ₹7,490 ₹1,14,490
3 ₹1,14,490 ₹8,014 ₹1,22,504
4 ₹1,22,504 ₹8,575 ₹1,31,079
5 ₹1,31,079 ₹9,175 ₹1,40,254

The interest that is earned every year is invested back or added back to the fixed deposit, which is called compounding. Here, the total interest that the investor makes on the deposit is ₹40,254. The depositor will receive the interest only at the end of 5 years along with the principal amount. The earned interest income is taxable only at the time of maturity. 

Who should invest in a Cumulative Fixed Deposit? 

A cumulative fixed deposit is well suited for those who do not rely on income through interest. Generally, a person looking for a long-term investment option or individuals with savings resting idly in their bank accounts can consider opting for cumulative fixed deposit investment. 

What is a Non-Cumulative Fixed Deposit?

A non-cumulative fixed deposit pays the accumulated interest regularly to the investor. Based on the choice of the investor, interest can be monthly, quarterly, half-yearly or yearly. It is essential to know that the interest rates vary for each payout option. For instance, the interest rates for monthly, quarterly, half-yearly and yearly payouts can be 6.5%, 6.75%, 7% and 7.05%, respectively. Furthermore, the interest earned is taxable in the hands of investors at the time of receipt. 
The tenure ranges from 6 months to 5 years. A non-cumulative is preferred by investors who require a regular income, for example, pensioners. Let us understand a non-cumulative fixed deposit with the help of an example.
Let us look at an example to understand this better. If a depositor starts a fixed deposit with ₹1,00,000 for a tenure of 5 years at the interest of 7% p.a., assuming that the interest payout is every year. His interest earned is shown below.
 
 
Year Deposit Interest earned Total amount
1 ₹1,00,000 ₹7,000 ₹1,07,000
2 ₹1,00,000 ₹7,000 ₹1,07,000
3 ₹1,00,000 ₹7,000 ₹1,07,000
4 ₹1,00,000 ₹7,000 ₹1,07,000
5 ₹1,00,000 ₹7,000 ₹1,07,000

The total interest that the depositor earns on his fixed deposit is ₹35,000. The depositor receives ₹7,000 every year for a tenure of 5 years. The interest is not compounded because it is paid to the depositor yearly. The interest income is taxable as per the investor's income tax slab rate.

Who should invest in a Non-Cumulative Fixed Deposit?

A non-cumulative fixed deposit will be a good choice for those who want a regular income, especially retired people and senior citizens. In other words, if you want a consistent income from your savings, this is the right choice.

Cumulative vs Non-Cumulative Fixed Deposit, what is the difference?

Interest Payout in a Fixed Deposit
The point of differentiation between cumulative and non-cumulative fixed deposits lies in the interest payout frequency. In a cumulative fixed deposit, the interest is payable at maturity, while in a non-cumulative fixed deposit, the interest is payable as per the investor's choice.
In a cumulative fixed deposit, the interest earned is reinvested, and is paid only on maturity. The interest compounds every quarter or every year. For instance, Ms Rai deposits ₹1,00,000 at a rate of interest of 7% in a cumulative scheme for a tenure of 2 years. Ms Rai will not receive any interest before the completion of 2 years because the interest is accumulated and given out on maturity. The maturity amount for Ms Rai is ₹1,14,490. The interest she earns during his cumulative fixed deposit tenure is ₹14,490.
On the other hand, in a non-cumulative fixed deposit, the interest payout depends on the investor. The investor can choose an interest payout frequency according to his needs. The depositor has the choice of selecting between monthly, quarterly, half-yearly or yearly interest payouts. 

Income Flow in a Fixed Deposit

The depositor does not receive interest during the fixed deposit tenure in a cumulative fixed deposit. The interest is accumulated along with the principal amount and is paid as a lump sum at the end of the tenure. On the other hand, in non-cumulative fixed deposits, the depositor will receive money at regular intervals and hence, is a good source of income. . 

Reinvestment

The interest earned is reinvested in a cumulative deposit where the interest compounds every year. Hence, this can fetch an investor a higher return than a non-cumulative fixed deposit. On the other hand, in a non-cumulative fixed deposit, there is no interest reinvestment. The interest is paid at regular intervals. Also, the total interest rate is lower than the cumulative fixed deposit option.

Suitability

A cumulative option earns compound interest and higher returns than a non-cumulative fixed deposit. Since the maturity period ranges between 6 months to 5 years for a cumulative fixed deposit, it is a suitable option for a long-term investment for individuals who wish to receive a guaranteed amount at the end of their investment tenure. However, a regular income may not be the preference of every investor, and so there is the option of a cumulative fixed deposit. Commonly, a cumulative fixed deposit is also known as a money multiplier. Therefore, cumulative fixed deposit suits salaried individuals or individuals with stable profits.
However, individuals who look out to earn regular income from their investments can opt for a non-cumulative fixed deposit. Therefore, the non-cumulative fixed deposit scheme is suitable for retired people, freelancers, homemakers, etc., who might depend on regular interest payments from their savings.

Cumulative fixed deposit Vs Non-Cumulative fixed deposit, which one is better?

The choice between these two types of interest payouts can be an investor's decision depending on their requirement and needs. If your investment purpose is to add something to your existing income or get a pension after retirement, then it is best to choose a non-cumulative fixed deposit.
However, suppose your investment purpose is not to look for any add-on but to multiply your existing savings at a good exponential rate, you can opt for a cumulative fixed deposit without any second thought.

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