Fixed deposits (FDs) are a popular savings tool in India. They offer guaranteed returns and capital protection. You can choose between cumulative and non-cumulative FDs. Both options have their benefits. The choice depends on your financial goals.
What is a Fixed Deposit?
A fixed deposit (FD) is a savings tool where you deposit money with a bank or NBFC for a predetermined period. In return, you receive a fixed interest rate on the amount for the duration of the FD’s tenor.
Understanding Cumulative Fixed Deposits
In a cumulative FD, the interest you earn is not paid out periodically. Instead, it is compounded and added to the principal amount. This process continues until the end of the FD tenor. At maturity, you receive the principal and the total interest earned.
Benefits of Cumulative FDs
Higher Returns
Due to the compounding effect, the interest earned is added to the principal. This means you earn interest on a larger amount over time.
Ideal for Long-Term Goals
If you do not need regular income, cumulative FDs help in building a larger corpus.
Example
Let us consider an example to understand better. Suppose you invest ₹1,00,000 in a cumulative FD with a 7% p.a. interest rate for 5 years. The interest is compounded annually. At the end of 5 years, you will receive ₹1,40,255.
Understanding Non-Cumulative Fixed Deposits
In a non-cumulative FD, the interest is paid out at regular intervals. These intervals can be monthly, quarterly, half-yearly, or yearly. The principal remains the same throughout the tenor.
Benefits of Non-Cumulative FDs
Regular Income
These FDs provide periodic interest payouts. They are suitable for those who need a steady income.
Flexibility
You can choose the frequency of interest payouts according to your needs.
Example
Suppose you invest ₹1,00,000 in a non-cumulative FD with a 7% p.a. interest rate for 5 years. The interest is paid quarterly. You will receive ₹1,750 every quarter.
Key Differences Between Cumulative and Non-Cumulative FDs
Knowing the key differences between cumulative and non-cumulative FDs helps you decide wisely. Here is a detailed comparison:
| Feature | Cumulative FD | Non-Cumulative FD |
| Interest Payout | Paid at maturity | Paid at regular intervals (monthly, quarterly, half-yearly, yearly) |
| Compounding Effect | Yes, interest compounds over time | No, interest does not compound |
| Effective Yield | Higher due to the compounding effect | Lower compared to cumulative FD |
| Ideal For | Long-term savings goals like retirement | Regular income needs such as monthly expenses |
| Interest Rates | Typically, the same as non-cumulative FD but yields more due to compounding | Typically, the same as cumulative FD |
| Liquidity | Less liquid, as interest is paid at maturity | More liquid, as interest is paid regularly |
| Tax Implications | Tax is paid on interest accrued at maturity | Tax is paid on interest received at intervals |
| Investment Growth | Significant growth due to compounding | Steady income without significant growth |
| Suitable For | Investors who do not need periodic income and can leave the money invested for the tenor | Investors who need regular cash flow |
| Flexibility | Less flexible, as funds are locked in until maturity | More flexible, as regular payouts provide liquidity |
| Reinvestment Option | Principal and interest reinvested until maturity | Interest can be used or reinvested separately |
How to Choose Between Cumulative and Non-Cumulative FD
Financial Goals
Assess your financial goals. If you are saving for a long-term goal, such as buying a house, a cumulative FD might be better. If you need regular income, opt for a non-cumulative FD.
Income Needs
If you need regular payouts, a non-cumulative FD is the way to go. This is useful for retirees or those needing periodic income.
Interest Rates
Compare interest rates offered by different banks and NBFCs. Choose the one that aligns with your goals.
Shriram Finance FD: An Option to Consider
Shriram Finance offers both cumulative and non-cumulative FDs. Here are the interest rates as of July 2024:
Non-Cumulative Deposit
| Tenor (Months) | Monthly % p.a. | Quarterly % p.a. | Half-Yearly % p.a. | Yearly % p.a. |
| 12 | 7.59 | 7.63 | 7.71 | 7.85 |
| 15 | 7.87 | 7.92 | 8.00 | 8.15 |
| 18 | 7.73 | 7.77 | 7.85 | 8.00 |
| 24 | 7.87 | 7.92 | 8.00 | 8.15 |
| 30 | 8.05 | 8.10 | 8.18 | 8.35 |
| 60 | 8.05 | 8.52 | 8.62 | 8.80 |
Cumulative Deposit
| Period (Months) | Interest Rate % p.a. |
| 12 | 7.59 |
| 15 | 7.87 |
| 18 | 7.73 |
| 24 | 7.87 |
| 30 | 8.05 |
| 60 | 8.47 |
Steps to Invest in an FD
Research: Check the interest rates and tenor offered by various banks and NBFCs.
Choose the FD Type
Decide between cumulative and non-cumulative based on your goals.
Documentation
Keep your documents ready, including ID proof, address proof, and PAN card.
Deposit Amount
Decide the amount you want to deposit.
Apply
You can apply online or visit the bank/NBFC branch.
Tax Implications
The interest earned on FDs is considered taxable income under the Income Tax Act, 1961. It is added to your total income and taxed according to your applicable income tax slab rate. For example, if you fall under the 20% tax bracket, the interest earned will be taxed at 20%.
Furthermore, banks and NBFCs are required to deduct tax at source (TDS) on the interest earned if it exceeds ₹40,000 in a financial year. For senior citizens, this threshold is higher at ₹50,000. The TDS rate is 10% if your PAN is provided; otherwise, it is 20%. If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the bank or NBFC to prevent TDS deduction.
Conclusion
Choosing between cumulative and non-cumulative FDs depends on your financial goals. It also depends on your income needs. Cumulative FDs are suitable for long-term savings. Non-cumulative FDs are ideal for regular income. Shriram Finance FD offers competitive interest rates for both options. Assess your goals and choose the FD type that best suits your needs.
For more information on interest rates, visit the official websites of banks and NBFCs.
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