Depending on the mode of interest payment, fixed deposits are of two types – cumulative FD and non-cumulative FD. Non-cumulative fixed deposits pay interest to investors at regular intervals. These payments can be on a monthly, quarterly, half-yearly or yearly basis. Sometimes a bank may also offer other frequencies of payment. Investors have the option to choose the interest payment tenure at the time of opening their fixed deposits.
For example, let’s say you invest Rs 100,000 in a non-cumulative fixed deposit for 33 months and select the monthly interest payment option. As an example using the interest rate table of HDFC Ltd shown below, if you take the monthly payment option at Rs.100,000 FD Over 33 months, then you will be paid 6.7 percent or Rs 6,700 per year in 12 monthly installments of Rs 558.33 each. For 33 months you will get a total interest of Rs 18,424.89, which will be paid in monthly installments of Rs 558.33 each. However, if you choose the annual payment option, you will get a higher interest rate of 6.9 per cent per annum. month. The interest rate per annum is higher on annual payments as compared to monthly payments because you are being paid interest first in case of monthly payments.
HDFC Special Deposit amount up to Rs 2 crore with effect from August 19, 2022
Source: HDFC Website
On the other hand, cumulative fixed deposits pay interest at the time of maturity of the FD along with the return of the principal. In this scheme, the interest earned on the investment is reinvested, and compounded for the period for which the FD is invested. Investors will have the option to choose the tenure of the FD or the time period for which the returns are compounded at the time of opening the deposit. Generally, due to compounding effect, the total interest paid on cumulative FDs on maturity will be higher than the interest paid monthly/quarterly on non-cumulative FDs of the same amount assuming the same rate of interest per annum for both . It is to be noted that in cumulative fixed deposit schemes there is no fixed interest payable on monthly or quarterly or half-yearly or yearly basis.
Non-cumulative FD vs Cumulative FD, which one should you choose?
Both cumulative and non-cumulative fixed deposits have their own advantages. Non-cumulative FDs are ideal for those who require a fixed return at regular intervals such as senior citizens. They can invest a lump sum amount in non-cumulative fixed deposits and earn periodic returns every month or every quarter.
Cumulative Fixed Deposit would be a more suitable option for those who want to accumulate enough money to meet a particular goal. The interest rate on cumulative FDs is generally higher than the interest rate offered on non-cumulative fixed deposits of the same tenor.
Banks to deduct 10 percent from tax at source (TDS) FD interest As per the current tax law, if the interest from all the deposits held by the individual in the bank (in all branches) exceeds Rs.40,000 in a financial year, then the payment/credit is made. For senior citizens or those aged 60 years or more, the TDS exemption limit has been set at Rs 50,000 per financial year. Interest paid to senior citizens in excess of this limit will be subject to TDS. Interest is taxable on all types of FDs- cumulative and non-cumulative, but individuals can claim tax deduction (as applicable to them) against this interest income in their income tax return.
Investment in a cumulative or non-cumulative fixed deposit depends on the income needs of an investor; Told Virat Dewanji, Group President and Head, Consumer Banks and Member, Group Management Council, Kotak Mahindra Bank,