Cumulative FD and Non-Cumulative FD
Fixed deposits are one of the most sought-after financial instruments in India. Millions of Indians put their life savings in fixed deposit schemes offered by banks across India. However, investors should understand the various types of fixed deposits to ensure that they get their desired results on their deposits.
A fixed deposit can be placed for a minimum period of seven days. Fixed deposit schemes are offered by all banks in india such as State Bank of India, IDBI Bank, HDFC Bank, Bank of India and Corporation Bank among many others.
What is a Cumulative Fixed Deposit?
There is no fixed interest payable over a quarter, half-year or annually in a cumulative fd scheme in that the interest rate is compounded every quarter or year and payable at the time of maturity with the principal.
What is a non-cumulative Fixed Deposit?
The interest is paid on a quarterly, monthly or annual basis in non-cumulative fixed deposit schemes. Also, the interest earned monthly from your non-cumulative fixed deposits will be taxable.
This scheme is most suitable for an individual who is in need of an interest payout periodically.
Cumulative Versus non-cumulative FD
There are two types of fixed deposits- cumulative and non-cumulative fixed deposits. There is no fixed interest - half-yearly or every year in a cumulative fixed deposit scheme, i.e, interest rate is compounded every year and then paid at the end of the tenure.
For instance, if you deposit in a financial firm at 10% interest under a cumulative scheme, you will not get interest every month or yearly but only at the end of the scheme tenure.
At the end of tenure, the firm will pay the principal amount and accumulated interest. In other words, if you have a fixed deposit for Rs.1 lakh, every year, you can earn an interest of Rs.10,000 (simple rate of interest). At the end of the first year, you will get back Rs. 1.10 lakhs.
If Rs, 1 lakh is put in a non-cumulative scheme, the interest is paid every annually or monthly as decided by a firm. If the interest is paid every quarter, an individual gets Rs.2500. Investors who want a regular income can opt for non-cumulative scheme and those who do not can opt for cumulative schemes.
In a cumulative or reinvestment fixed deposit, interest is compounded quarterly. The compounded interest is then reinvested with the principal amount. The maturity period of cumulative fixed deposits ranges anywhere from six months to 10 years.
Given that in a cumulative fixed deposit scheme, interest is paid at the time of maturity in addition to the principal amount, it is most suitable for individuals who are not in need of regular interest payment.
Cumulative fixed deposit schemes can, therefore, be known as money multiplier schemes. On the contrary, in a non-cumulative fixed deposit scheme, interest is payable at fixed frequencies. Non-cumulative fixed deposit schemes are, therefore, suitable for pensioners who are in need of periodical payment of interest.
Fixed Deposit Calculator
The fixed deposit calculator gives the return on the principal amount upon quarterly compounding of interest. Also, the effective yield, the return on a fixed deposit depends on the interest rate and the compounding frequency. In India, most major banks do quarterly compounding to arrive at the maturity value of fixed income deposits. To use the calculator, you will have to fill in details such as the following:
- Principal amount
- Interest Rate
- Period of Deposit
Upon filling up of the above details, you will have to submit the data to get the maturity amount, interest and yield.
For instance, if you have a fixed deposit of Rs. 1 lakh at 8% interest for a period of five years, your total interest receivable will be Rs.48,595. The total maturity amount will be Rs.1,48,595 while the effective yield will be 9.719.
The compounding interest formula(quarterly) is as follows:
A= P (1+r/n)nt
A = final amount
P = principal amount
r = nominal interest rate (as a decimal)
n = number of times interest is compounded (monthly compounding - 12, half-year - 2 and 4 for quarter)
t = number of years
Example
Customers can also opt for monthly, quarterly, half-yearly or yearly compounding frequency. For instance, if you deposit Rs.1 lakh for a period of 5 years at 8.5% interest and monthly compounding frequency, you will receive Rs.1,52,730 as maturity amount and 10.54 as effective yield. If your opt for quarterly compounding for the same principal and interest, you will receive Rs. 1,52,279 as maturity amount with an effective yield of 10.45. If you opt for half-yearly compounding frequency for the same principal and FD interest rate, you will receive Rs.1,51,621 as maturity amount and 10.32 as effective yield. If you opt for compounding frequency on an annual basis, you will receive Rs.1,50,365 as maturity amount and 10.07 as effective yield.
If you put Rs.1,00,000 in a non-cumulative fixed deposit scheme on an annual basis for a period of five years at 9.25% p.a, your maturity amount will be Rs.1,46,250 (interest earned is Rs.46,250). On a monthly, half-yearly and quarterly basis for the same principal, interest rate and tenure, the maturity amounts will be Rs.1,44,500 and Rs.1,45,250 and Rs.1,44,750 respectively.
FAQs on Cumulative and Non-Cumulative FDs
- Who should opt for a cumulative fixed deposit?
Cumulative fixed deposits are ideal for the investors whose primary aim of investment is to fuel their goals financially.
- Who should opt for a non-cumulative fixed deposit?
Non-cumulative fixed deposits are ideal for the investors who invest with the motive of acquiring periodic income through the investment.
- How is cumulative interest credited for fixed deposits?
Cumulative interest for fixed deposits is credited to the FD accounts and paid out at the end of the investment tenure.
- How is non-cumulative interest credited for fixed deposits?
Non-cumulative interest for fixed deposits is credited to the FD accounts on a periodic basis and is paid out at the end of each period as per the preference of the investor.
- How does a Cumulative Fixed Deposit differ from a Regular Fixed Deposit?
In a Regular Fixed Deposit, the interest is paid out periodically, either monthly, quarterly, or annually, depending on the depositor's preference. However, in a Cumulative Fixed Deposit, the interest is compounded and reinvested with the principal amount until maturity, resulting in higher overall returns.
- What are the advantages of investing in a Cumulative Fixed Deposit?
One of the main advantages is the power of compounding, which allows for potentially higher returns compared to regular fixed deposits. Additionally, it provides convenience as the interest is automatically reinvested, eliminating the need for the depositor to manually reinvest or manage the interest payouts.
- What is the tenure range available for Cumulative Fixed Deposits?
The tenure for Cumulative Fixed Deposits typically ranges from a few months to several years, depending on the bank's policies. It's essential to check with the respective bank to determine the available tenure options.
- Can I withdraw funds from a Cumulative Fixed Deposit before maturity?
While premature withdrawal may be allowed by some banks, it often comes with penalties or a reduction in the interest rate earned. It's advisable to review the terms and conditions regarding premature withdrawal before opening a Cumulative Fixed Deposit account.
- Are Cumulative Fixed Deposits suitable for short-term or long-term investments?
Cumulative Fixed Deposits can be suitable for both short-term and long-term investments, depending on the depositor's financial goals and investment horizon. Short-term investments may offer liquidity, while long-term investments may maximize the benefits of compounding.
- Are the interest rates on Cumulative Fixed Deposits fixed or variable?
The interest rates on Cumulative Fixed Deposits are typically fixed for the deposit. However, it's essential to confirm whether the rates offered are fixed or variable at the time of opening the deposit, as this may vary among different banks.
- Is the interest earned on Cumulative Fixed Deposits taxable?
Yes, the interest earned on Cumulative Fixed Deposits is generally taxable as per the depositor's income tax slab. Banks may deduct Tax Deducted at Source (TDS) on the interest earned, as per prevailing tax regulations.
- Can I avail myself of a loan against a Cumulative Fixed Deposit?
Some banks offer the facility of availing loans against Cumulative Fixed Deposits as collateral. The loan amount sanctioned is typically a percentage of the deposit's value, and the interest rate may be lower compared to other types of loans due to the security provided by the deposit.
- Can I convert my Non-Cumulative FD into a Cumulative FD or vice versa?
Depending on the terms and conditions of the financial institution, it may be possible to convert between Cumulative and Non-Cumulative FDs, although this could involve certain restrictions or penalties.
- How do I choose between Cumulative and Non-Cumulative FDs?
Consider factors such as your financial goals, liquidity needs, and investment horizon. For long-term wealth accumulation with minimal liquidity requirements, Cumulative FDs might be suitable, whereas for regular income needs or short-term goals, Non-Cumulative FDs could be more appropriate. Always consult with a financial advisor before making investment decisions.
- Are there any tax implications specific to cumulative or Non-Cumulative Fixed Deposits?
Tax implications for both types of FDs are the same, as interest earned is subject to taxation as per prevailing tax laws. However, the timing of interest payout may affect tax liability in the case of non-cumulative FDs.
- Which type of Fixed Deposit provides better liquidity?
Non-cumulative FDs offer better liquidity since they provide regular interest payouts, allowing investors to access a portion of their funds without breaking the entire deposit.
- Can I withdraw the interest earned before maturity in Cumulative FDs?
No, in Cumulative FDs, the interest earned is reinvested into the deposit and paid out along with the principal amount only at maturity.
- What is a Non-Cumulative Fixed Deposit?
Instead of reinvesting the interest earned, a Non-Cumulative Fixed Deposit pays out interest at regular intervals (monthly, quarterly, half-yearly, or annually).
- Who should invest in a Non-Cumulative FD?
Non-Cumulative FDs are ideal for retirees, those needing periodic cash flow, or individuals seeking regular income from their investment.
- How does the interest payout work in a Non-Cumulative FD?
Interest is paid out directly to the investor's bank account as per the chosen frequency (monthly, quarterly, etc.).
- What are the benefits of a Non-Cumulative FD?
Benefits of a non-cumulative FD include flexibility in interest payout options, regular income streams, and reduced risk of decrease in interest rate for those needing periodic payments.
- Is the interest earned on a Non-Cumulative FD taxable?
Yes, the interest earned on non-cumulative FD is taxable and must be declared as income for tax purposes.
- Can I prematurely withdraw from a Non-Cumulative FD?
Premature withdrawal of non-cumulative FD is permitted but may incur penalties and the interest rate may be reduced.
- How is the interest rate determined for a Non-Cumulative FD?
The interest rate is determined depending on the tenure and frequency of interest payouts chosen, which remains fixed at the time of deposit.
- Can I renew a Non-Cumulative FD upon maturity?
Yes, you can renew your non-cumulative FDs, and the interest rate applicable at the time of renewal will be applied.
- Are loans available against a Non-Cumulative FD?
Yes, loans or overdrafts are available against the deposit in a Non-Cumulative FD, like Cumulative FDs.
- What is the impact of interest rate changes on a Non-Cumulative FD?
The change in interest rate does not impact much on the Non-Cumulative FD, as the interest rate agreed upon at the time of investment is fixed for the entire tenure, thereby protecting the investor from market interest rate fluctuations.
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