look news india
Bank Fixed Deposit (FD) is still considered the most secure, transparent and reliable savings instrument among Indian families. Whenever investors from cities like Delhi, Lucknow, Mumbai, Patna or Jaipur deposit their hard-earned money in the bank, they often pay attention to only two things – what interest rate the bank is offering and for how many years the money is being deposited.
Most of the depositors get confused when while filling the bank form or in the net banking app they are asked whether they want to choose ‘Cumulative’ or ‘Non-Cumulative’ FD. Choosing both of these options completely changes your final returns and cash in hand. If you choose the wrong option without thinking, then either you will not get regular income at the time of need or you will lose out on huge profits due to compounding interest.
Cumulative Fixed Deposit is called ‘Sanchayi Fixed Deposit’ in Hindi. It is also called ‘re-investment plan’ in common parlance. In this option, the bank does not send the interest earned by you to your savings account from time to time, rather that interest gets added to your principal.
In Indian banks, interest is generally calculated on the basis of quarterly compounding. This simply means that interest is earned on the principal amount in the first quarter. In the second quarter, interest is paid again on the sum of the principal amount and the interest of the first quarter. This process continues for the entire tenure and on the day of maturity, the entire accumulated interest along with the principal amount is credited to your account in lump sum. This option is most suitable for those investors who do not need money in the meantime and want to grow their capital rapidly in the long term.
Non-cumulative fixed deposits are called ‘non-cumulative fixed deposits’ or regular payment options. In this scheme, instead of adding the interest back to the principal amount, the interest is transferred directly to the investor’s savings bank account at fixed time intervals.
Banks generally allow customers to choose the interest withdrawal option as per their convenience:
-
Monthly Payout: In this, interest is credited to the account on a fixed date of every month. However, in monthly payout, banks pay on the basis of partially discounted value at simple interest rate.
-
Quarterly Payout: The interest earned is credited to the account every 3 months.
-
Half-Yearly / Annual Payout: Lump sum interest is paid every 6 months or 1 year.
This scheme is a panacea for senior citizens, pensioners and housewives who need a fixed income every month or every quarter to meet their daily household needs, medicine expenses or to manage the monthly budget.
Suppose you deposit a sum of ₹5,00,000 in a leading bank at an annual interest rate of 7.00% for 5 years. The exact calculation of returns you will get in both the options will be as follows:
-
Returns in Cumulative FD: Based on 7% quarterly compounding, your total maturity amount after 5 years will be approximately ₹7,07,389. In this you will get total net interest of approx. ₹2,07,389 will receive.
-
Non-Cumulative FD (Quarterly Payable): Every 3 months, approximately ₹ 8,750 interest will accrue in your savings account. You will get a total of 20 quarters in 5 years. ₹1,75,000 You will get interest in cash and ultimately your principal amount of ₹5,00,000 will be refunded.
The simple difference is that due to earning interest on interest in the cumulative option, you got a total additional profit of about ₹ 32,389.
-
interest paid: In cumulative, the entire amount is received in lump sum on maturity, whereas in non-cumulative, it is received in regular installments at monthly, quarterly or yearly intervals.
-
Advantage of compounding: Cumulative provides maximum benefit of compound interest, resulting in higher net returns. In non-cumulative, the benefit of compounding becomes zero due to interest being taken out.
-
Cash Liquidity: In cumulative, your money remains completely locked till maturity. In non-cumulative, liquidity is maintained by money coming into the account at regular intervals.
-
Investor Objective: The main objective of cumulative is ‘wealth creation’ i.e. increasing capital, whereas the primary objective of non-cumulative is to earn ‘regular income’.
Many taxpayers have a misconception that the money in cumulative FD is received on maturity, hence tax will be levied only after 5 years. According to income tax rules this is not at all the case. Under the Income Tax Act, interest income is taxable on ‘accrual basis’.
Even if you have chosen a cumulative FD and the money is being deposited in the bank itself, the bank deducts TDS on the interest earned in your account every financial year. If the total interest received from all FDs in a financial year exceeds ₹ 40,000 for a general citizen and ₹ 50,000 for a senior citizen, then the bank deducts TDS at the rate of 10% and registers it in Form 26AS/AIS. So in terms of tax liability, both the options are equally taxable as per the tax slab of your total income.
If you already have an FD and don’t remember which category it is in, you can check in minutes with these 3 methods:
-
FD Receipt (Fixed Deposit Receipt): Look at your physical or digital FD receipt. If ‘Reinvestment Deposit’, ‘Cumulative’, ‘STDR’ (Special Term Deposit Receipt) is written before the name of the scheme, then it is cumulative. If it says ‘TDR’ (Term Deposit Receipt), ‘Quarterly Interest’, or ‘Monthly Income’, then it is non-cumulative.
-
Maturity Amount Column: If the maturity amount written on the receipt is much more than the principal amount (principal + total compounded interest), then it is cumulative. If the maturity amount is written equal to the principal amount only, then it is non-cumulative.
-
Net Banking or Mobile App: Go to ‘Deposit Accounts’ section in the bank app and click on your FD. Look there for ‘Interest Payout Frequency’. If it says ‘On Maturity’, then it is cumulative; If ‘Monthly’ or ‘Quarterly’ is written, then it is non-cumulative.
So, if you are employed and are adding capital for any future goal (like children’s education, marriage or a new house), then always Cumulative FD Select. But if you are retired and want pension like income every month to meet household expenses, then Non-Cumulative FD It will be most suitable for you.