The Great Fixed Deposit Debate: Cumulative vs. Non-cumulative

Posted on Monday, April 29th, 2024 | By IndusInd Bank

Fixed deposits are a cornerstone of many investment portfolios in India. They offer a safe haven for your money, guaranteeing a fixed return over a predetermined tenure. But within the world of FDs, a crucial decision arises: cumulative vs non-cumulative fixed deposits?  Understanding the distinctions between these two options can significantly impact your financial goals. 

Cumulative FDs: The Power of Compounding 

Imagine a snowball rolling downhill, gathering momentum and size as it goes. That’s the magic of compound interest, the cornerstone of cumulative FDs. In this type of FD, the interest earned is not paid out periodically. Instead, it gets added to the principal amount at predefined intervals (usually quarterly). This creates a snowball effect, where you earn interest not just on your initial investment but also on the accumulated interest. This translates to a higher overall return compared to a non-cumulative FD with the same interest rate.  

Also Read –  Fixed-Deposit: How Does Compounding Frequency Affect Returns  

Benefits of Cumulative FDs: 

• Higher Returns: Compounding interest is your friend! The longer your money stays invested, the greater the snowball effect.  

• Suitable for Long-Term Goals: Cumulative FDs are ideal for long-term financial goals. The power of compounding works best over extended periods, allowing you to build a substantial corpus for the future. 

• Discipline and Consistency: By locking away your money for a fixed period and reinvesting the interest, cumulative FDs encourage disciplined saving. You’re less likely to make impulsive withdrawals. 

Drawbacks of Cumulative FDs: 

• Limited Liquidity: Once you invest in a cumulative FD, your money is locked in until maturity. Early withdrawals typically attract penalties, impacting your overall return. 

• Tax Implications: With cumulative FDs, the interest is compounded and taxed as income upon maturity. This can lead to a higher per-year tax burden compared to non-cumulative FDs. 

Non-cumulative FDs: Regular Income Stream 

Non-cumulative FDs cater to a different set of needs. Here, the interest earned is paid out at periodic intervals chosen by you – monthly, quarterly, half-yearly, or annually.  

Benefits of Non-Cumulative FDs: 

• Regular Cash Flow: Non-cumulative FDs are perfect if you require a predictable flow of income to meet regular expenses or ongoing financial commitments. The periodic interest payouts act as a reliable source of funds. 

• Enhanced Liquidity: The interest payments allow you to access a portion of your investment without penalty, providing a safety net in case of unforeseen circumstances. 

• Lower Tax Liability: Since the interest is paid out and taxed each year, the tax burden is spread out. This can be beneficial for individuals in lower tax brackets. 

Drawbacks of Non-Cumulative FDs: 

• Lower Returns: Since the interest earned is not reinvested, you miss out on the compounding benefit. This can result in a lower overall return compared to cumulative FD with the same interest rate. 

• Less Ideal for Long-Term Goals: Non-cumulative FDs may not be the most efficient option for long-term goals. The lack of compounding can limit the growth potential of your investment over extended periods. 

The Final Verdict: It’s All About Your Needs 

There’s no single “best” option when it comes to cumulative and non-cumulative FDs. The ideal choice depends on your individual financial goals, risk tolerance, and liquidity needs: 

• Choose cumulative Fixed Deposits for long-term financial goals, maximising returns through compounding, and disciplined saving. 

• Choose non-cumulative Fixed Deposits for regular income needs, greater liquidity, and a potentially lower tax burden. 

Also Read – Smart Ways To Pick The Right Fixed Deposit  

By carefully evaluating your financial situation and investment goals, you can choose the Fixed Deposit account type that aligns best with your needs and helps you achieve your financial aspirations.  IndusInd Bank recognizes the diverse needs of its customers and offers both cumulative and non-cumulative FDs. This flexibility allows you to tailor your investment to your financial goals. Whether you prioritise compounded interest or the comfort of regular payouts, IndusInd Bank’s Fixed Deposit account remains a secure and dependable option for growing your savings. 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.