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Cumulative FD and Non-Cumulative Deposit

A fixed deposit is considered one of the best investment opportunities because it allows investors to gain interest on their investments over a certain period of time and at a set FD rate of interest.

 

A fixed deposit comes in two forms, cumulative and non-cumulative FD, depending on how you choose to collect the interest payments. However, there is a difference between cumulative deposits and non-cumulative deposits.

 

Before we get into the difference part, let us understand what is the meaning of cumulative and non-cumulative fixed deposits. These deposits are divided based on the interest payout. 

Cumulative Fixed Deposit 

The meaning of the word cumulative is accumulation. When it comes to a cumulative deposit, the interest on the lump sum amount deposited is accumulated till the end of the maturity period. Here the cumulative interest means the interest earned in one year is reinvested or added to the previous principal. This pumped-up interest increases the principal amount.

 

The power of compounding is put to best use in the case of a cumulative FD. A cumulative FD means that once your FD matures, you receive your initial deposit amount along with the accumulated interest as the final amount. Usually, a cumulative FD for a longer tenure has a higher interest income.

 

If you are an individual who is not dependent on regular interest income the most suitable fixed deposit option will be a cumulative fixed deposit. So you can opt for cumulative FD investment, if you are a salaried employee or individual with good profits from business.

 

An individual who is planning to save a lump sum amount for future ventures can invest in cumulative FD. Note that the option of cumulative FD is suitable only if you are able to lead a life without interest payouts at regular intervals.

 

Let us take an example here. If you invest Rs. 1 lakh in a cumulative FD with a bank for a year at a 10% interest rate, you will receive Rs. 1,10,000 at the end of the maturity period. This is the sum of the principal amount and the interest earned in a year.

 

What if the investment is for 5 years? Here is a table to understand better.

 

Year

Investment

Interest

Final amount

1

Rs. 100000

Rs. 10000

Rs. 110000

2

Rs. 110000

Rs. 11000

Rs. 121000

3

Rs. 121000

Rs. 12100

Rs. 133100

4

Rs. 133100

Rs. 13310

Rs. 146410

5

Rs. 146410

Rs. 14641

Rs. 161051

The interest earned each year is added to the previous principal amount. You will earn Rs. 61,051 as the total interest on the FD. At the end of 5 years, a huge amount including the principal amount and interest will be credited to the investor’s account.

 

To sum it up, a cumulative deposit is a type of fixed deposit where you invest your lump sum amount for a fixed tenure at an agreed rate of interest and the interest income is paid along with the principal amount at the time of maturity of the deposit.

Non-Cumulative Fixed Deposit

A non-cumulative deposit means,  the interest accrued is paid to the depositor at regular intervals. Unlike a cumulative deposit where the interest is compounded per year, in a non-cumulative FD, the interest accumulated on the deposit is paid out monthly, quarterly, half-yearly, or annually, depending on the depositor’s needs.

 

For example, the interest rates for payouts that happen monthly, quarterly, half-yearly and yearly can be 5.8%, 5.85%, 5.95% and 6.05% respectively. Also, the interest earned is taxable in the hands of investors at the time of receipt.

 

Suppose you deposit Rs. 1,00,000 in a non-cumulative fixed deposit in a bank. The interest payout is your choice. Based on the financial requirements, you can choose the interest payout frequency. Check out the amounts you can earn when you choose different kinds of frequency.

 

Frequency

Interest Rates

Interest Pay-Out 

Monthly

5.79%

Rs. 482

Quarterly

5.82%

Rs. 1,455

Half Yearly

5.88%

Rs. 2,940

Yearly

6.00%

Rs. 6,000

A non-cumulative FD is best for those investors who want to receive their interest income on a periodic basis depending on their needs. Since the power of compounding is not properly used here, this type of FD offers lesser interest as compared to a cumulative deposit.

 

Those individuals who wish to get an interest income into their bank account at regular intervals should choose a non-cumulative fixed deposit as it is the best option. People like freelancers, retirees, homemakers, etc., who like to get some steady income from their savings can consider investing in a non-cumulative FD.

 

Let us take another example here. If you invest Rs. 1 lakh in a non-cumulative FD with a bank at a 10% interest rate for a year, you will receive Rs. 2,500 each quarter if you have opted for a quarterly payout. Since the interest is not withheld by the bank, you will receive only the principal amount when the term ends.

 

If the tenure is 5 years, the total interest earned from the FD is Rs. 60,000. The investor will receive Rs. 12,500 each year for a tenure of 5 years. Also, the interest is not compounded because there is a yearly interest payout. The interest amount is taxable as per the investor’s income tax slab rate.

 

To conclude, a non-cumulative FD is a type of fixed deposit where the interest income is payable on a monthly, quarterly, half-yearly or annual basis based on the preference of the investor.

 

Features of Cumulative and Non-Cumulative FD

To help you understand the difference between cumulative and non-cumulative FD better, here's a table that compares their features:

 


Category


Cumulative FD


 Non-Cumulative FD

Frequency of Interest Payout 

Once the cumulative FD matures

As per investors choice - monthly or quarterly or half-yearly or annually 

Accumulation of

Interest 

Accrued throughout the cumulative FD tenure

Interest is not accumulated and is paid at regular intervals

Periodic Income

Not generated 

Generated throughout the tenure

Total Interest Earned 

For further compounding, the interest earned each year is added to principal, and as a result the total interest earned is higher 

Since the payout frequency is higher, the interest earned is lower, and the payout amount decreases  

Suitable For

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

Depositors looking to fund regular expenses, without denting the principal

Cumulative vs Non-Cumulative FD: Where Should You Invest?

Your investment criteria will determine whether you should go for a cumulative or non-cumulative deposit. Cumulative FDs are best for investors who don't need daily cash flows but want to save for long-term goals like creating a retirement nest egg or short-term goals like covering a big cost. Such investors can raise enough money to finance their goals by investing in a cumulative deposit. You can take the aid of cumulative FD calculators online at Bajaj MARKETS to know more.

 

Investors who require regular income, on the other hand, should consider a non-cumulative FD, which allows them to earn payouts on a regular basis. The payouts on these deposits can be seen as a replacement for normal income, making it easier for retirees to meet their monthly expenses. You can take the aid of a non-cumulative FD calculator online at Bajaj MARKETS to know more.

How to Maximise Your Fixed Deposit Returns?

You can maximise your returns by opting for a cumulative FD. In a cumulative FD, your earned interest is reinvested on the original deposit amount on a regular basis. This means that your interest earned in the first cycle is added back to your principal amount. 

 

In the next cycle, you will earn interest on this increased principal which is now with added interest income. This compounding of interest is done till the FD tenure gets over. In this way, you can maximise your returns from a fixed deposit by opting for a cumulative FD instead of a non-cumulative one.

FAQs

  • ✔️What is the difference between cumulative FD and non-cumulative FD?

    Interest is compounded quarterly in a cumulative or reinvestment fixed deposit. In a non-cumulative fixed deposit scheme, on the other hand, interest is paid at predetermined intervals. Non-cumulative fixed deposit plans are also appropriate for retirees who need periodic interest payments.    

  • ✔️What is the cumulative fd meaning?

    The interest on a cumulative fixed deposit is accumulated over the lifetime of the deposit and charged at maturity. Deposits that are held for a longer period of time typically gain higher FD prices.

  • ✔️What is the cumulative deposit meaning?

    The term "cumulative" refers to an accumulation. Similarly, a cumulative fixed deposit is one in which interest is accrued or earned before the maturity period ends. The interest gained over the course of a year or term is either reinvested or added to the previous principal, raising the principal sum.    

  • ✔️Is cumulative FD better?

    Interest earned on a cumulative deposit is greater than interest earned on a non-cumulative half-yearly deposit. The main difference is that in one case, interest is paid at maturity, while in the other, interest is paid at regular intervals.

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