Fixed deposits (FDs) are a popular investment choice among investors due to the secure and guaranteed returns offered. FDs come in two categories, i.e., cumulative and non-cumulative types, distinguished by their interest payout structure. 

 

Each type has its own set of features and benefits, catering to different financial goals and preferences. Cumulative FDs accumulate interest over the deposit period and pay out the entire principal amount along with the accumulated interest at maturity. 

 

Non-cumulative FDs, on the other hand, pay out the interest earned at regular intervals, depending on the investor's preference. However, investors must carefully consider the factors that differentiate them before investing. 

Difference Between Cumulative and Non-Cumulative FD

The following table presents a comparative analysis of cumulative vs non-cumulative fixed deposits: 

Particulars

Cumulative FD

Non-Cumulative FD

Interest payout frequency

At maturity 

On a monthly, quarterly, half-yearly, or annual basis

Accumulation of interest

Interest accrues throughout the tenor

Interest is paid at regular intervals

Periodic income

Not generated 

Generated throughout the tenor

Total interest earned

Compounding interest is added to the principal amount, leading to higher interest earnings

Due to interest payouts instead of accumulation, the earnings are comparatively lower earnings

Suitable for

Depositors looking to grow their savings and create a higher corpus for investment goals

Individuals depositing a substantial sum in an FD to benefit from frequent interest payouts

How is Cumulative FD Interest Calculated

For example, if you invest ₹1 Lakh in a cumulative FD with a bank for five years at an interest rate of 6% p.a. In that case, here is how the cumulative interest on your fixed deposit will be calculated each year. 

Year

Amount on Which Interest is Calculated

Interest Earned

Yearly Closing Balance

1

₹1,00,000

₹6,000

₹1,06,000

2

₹1,06,000

₹6,360

₹1,12,360

3

₹1,12,360

₹6,742

₹1,19,102

4

₹1,19,102

₹7,146

₹1,26,248

5

₹1,26,248

₹7,575

₹1,33,823

How is Non-cumulative FD Interest Calculated

Say you deposit ₹1 Lakh in a non-cumulative fixed deposit offered by a bank. Based on your financial requirements, you can choose an interest payout frequency. Explore the potential earnings based on various payout frequencies in the table provided below.

Payout Frequency

Interest Rate (p.a.)

Interest Rate for the Interest Payout Period (A)

Interest Earned per Payout

(A x ₹1,00,000)

Monthly

6.00%

0.50%

(i.e. 6% divided by 12 months)

₹500

Quarterly

6.00%

1.50%

(i.e. 6% divided by 4 quarters)

₹1,500

Half-yearly

6.00%

3.00%

(i.e. 6% divided by 2 half-years)

₹3,000

Annually

6.00%

6.00%

(i.e. 6% divided by 1 year)

₹6,000

FAQs on Cumulative vs Non-cumulative FDs

How does the interest accrual differ in cumulative and non-cumulative FDs?

Cumulative FDs accumulate interest and reinvest these gains throughout the investment period, leading to compounding benefits. Non-cumulative FDs disburse interest regularly, providing a steady income stream.

What are the payout frequency options for non-cumulative FDs?

Non-cumulative FDs offer payout frequencies such as monthly, quarterly, half-yearly, or annual, allowing investors to choose based on their income needs.

Which type of FD is suitable for those seeking regular income?

Non-cumulative FDs are ideal for individuals looking to supplement their current income, providing a reliable source of earnings at specified intervals. 

 

However, the viability of this option as an income source depends on the amount deposited and the financial support required by the individual.

If I want to grow my capital securely, which FD option should I choose?

For individuals focused on steady and uninterrupted capital growth, the cumulative FD option is more suitable due to its compounding nature.

Do non-cumulative FDs benefit from the power of compounding?

No. Non-cumulative FDs do not leverage the power of compounding, as interest is paid out regularly, and there is no reinvestment to earn additional interest.

Cumulative and non-cumulative FD: Which is better for me?

Choosing between cumulative or non-cumulative FDs becomes easier once your financial goals are clear. If your objective is to supplement your current income or establish a consistent source of earnings, a non-cumulative FD emerges as the more fitting choice.

 

Conversely, for those seeking a secure avenue to foster capital growth, the cumulative FD option proves more suitable. 

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