Should you take monthly interest on FD or on maturity? Understand the complete mathematics of compound interest and know which option is best for you.

Investors often come across two main options when opening a fixed deposit (FD) in a bank or financial institution: the first is non-cumulative (monthly or quarterly pay-out) and the second is cumulative (cumulative/lump sum payment on maturity).

Simply put, if you look at absolute returns, taking interest on maturity is always more profitable. The biggest reason behind this is the power of compounding. However, every person’s financial needs are different, so which option is right for you depends on your income needs and preferences.

when you Maturity Option (Cumulative FD) If you choose, the bank adds the interest earned to your principal every quarter. Interest is available on the newly increased principal amount for the next 3 months. This is called earning ‘interest on interest’.

On the contrary, when you Monthly Pay-out (Non-Cumulative FD) Select:

• The bank transfers your interest amount to your savings account every month.

• Your principal always remains fixed, so you do not get any benefit of compounding.

• Most banks pay out on a monthly basis by slightly ‘discounting’ (reducing) the annual rate from the quarterly compounded rate for the monthly pay-out.

Suppose you are in a bank ₹10,00,000 FD of 5 years For 7.5% annual interest rate But let’s get it done:

It is clear from this figure that by taking interest on maturity in a period of 5 years, you will get approximately More than ₹77,000 Direct additional profit of Rs.

Monthly pay-outs are a great option for those who need regular cash flow:

• Senior citizens and retired persons: Apart from pension, those who need fixed income every month for their daily household or medical expenses.

• Aspirants of additional income: Investors who have lump sum capital and want to use it to manage their monthly budget, house rent or children’s tuition fees.

If you do not have any immediate need of money every month, then you should choose the maturity option without thinking:

• Long-Term Wealth Creator: Young and working professionals who are adding funds for children’s higher education, marriage, down payment for home purchase or retirement.

• Those seeking maximum returns: Those who want to grow their wealth at maximum speed over the long term by taking full advantage of compounding on their capital.

Many people have the misconception that if they take interest on maturity, they will have to pay tax only after 5 years. As per income tax rules:

1. Tax on annual basis: Whether you withdraw the interest every month or take it on maturity, the bank deducts TDS on the interest earned by you every financial year and you have to pay tax on that interest as per your tax slab for that financial year.

2. TDS limit: Banks deduct 10% TDS if the FD interest exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year for general citizens. If your total income is not taxable, you can avoid TDS by submitting Form 15G or 15H in the bank.