Fixed Deposits (FDs) are India’s most popular and safe investment options. Fixed Deposit rates are crucial in deciding between cumulative and non-cumulative FDs. These investment instruments have been a traditional favorite because they offer guaranteed returns, good liquidity, and greater safety than other investment options.
There are 2 types of FDs (Fixed Deposit): Cumulative and Non-cumulative FD. Deciding between the two can be a crucial task. But FD calculators can help you make a well-formed decision depending on your financial goals.
What is Cumulative Fixed Deposit (FD)?
A Cumulative FD is best for people who need to build their savings in a long time frame. The distinguishing feature of this type of FD is that the interest earned is added to the principal amount, which gets compounded over time. This means you receive a lump sum at the end of the term instead of periodic interest payments.
- Interest Compounding: The interest is compounded over the principal, and the sum increases over time.
- Payout on Maturity: You get the full sum and interest after the FD maturity period.
- Taxation: The interest earned will be taxed according to your income tax slab upon maturity.
- Best Suited for Long-term Objectives: Good for investors wanting to build wealth in the long run without periodic payouts.
For example, if you invest ₹1 lakh in a Cumulative FD, you will get a maturity value greater due to the compounding power if kept for five years at an interest rate of 7% p.a.
What is a Non-cumulative Fixed Deposit (FD)?
Non-cumulative FDs are perfect for people who want regular, steady income.
- Periodic Interest Payments: You can choose to receive interest payments monthly, quarterly, half-yearly, or yearly.
- Taxation: The interest you earn is taxed in the same financial year you receive it.
- Flexible Payout Schedules: You may opt for the payout frequency according to your income requirements.
- Suited for Recurring Income Requirements: Ideal for retirees, freelancers, and homemakers requiring periodic income.
Cumulative vs Non-cumulative Fixed Deposit (FD)
An FD may be cumulative or non-cumulative, based on interest handling. In a Cumulative FD, interest is compounded and reinvested, and the entire amount is realized only at the time of maturity.
On the other hand, a Non-Cumulative FD distributes interest periodically on a monthly, quarterly, half-yearly, or annual basis without reinvestment.
The taxation also differs; Cumulative FDs are taxable when received at the time of maturity and non-cumulative FDs are taxed in the year of receipt. Moreover, Cumulative FDs are ideal for long-term financial goals, while non-cumulative FDs are ideal for those who need regular income.
Selecting the Correct Fixed Deposit (FD) for You
A cumulative FD is preferable if you wish to get maximum returns in the long term due to compounding. But a Non-Cumulative FD is ideal if you require income at regular intervals.
The application of an FD calculator can guide you in arriving at the prospective returns from the two kinds of FDs. By entering inputs like the amount of principal, term, and Fixed Deposit rate, you can easily compare the amount at maturity and recurring payments. An FD calculator enables you to make an educated investment choice.
Fixed Deposit rates may change, hence, you should compare the interest rates of different institutions. Comparison can help you accept higher Fixed Deposit rates, which give a better return.
To conclude
Both non-cumulative and cumulative Fixed Deposits can serve equally well depending on various financial objectives. An FD calculator can help in analyzing returns depending on current Fixed Deposit rates so that you can make the maximum investment choice. By assessing your financial needs for money, you can choose the correct FD which can be ideal for your long-term as well as short-term goals.
