A cumulative fixed deposit accumulates interest over the entire tenure and pays out the principal plus compounded interest only at maturity. This contrasts with non‑cumulative FDs, which pay interest monthly, quarterly, or annually. Cumulative FDs are suitable for investors seeking higher returns and who do not require periodic income. Because interest is reinvested, the effective yield is higher than the simple interest rate.
Differences Between Cumulative and Non‑Cumulative FDs
| Feature | Cumulative FD | Non‑cumulative FD |
|---|---|---|
| Interest payout | At maturity | Monthly/quarterly/half‑yearly/annually |
| Effective yield | Higher due to compounding | Lower since interest is not reinvested |
| Suitability | Long‑term wealth creation | Regular income seekers |
| Taxation | Interest taxed at maturity (if interest exceeds threshold) | Interest taxed in year of receipt |
Consider your cash‑flow needs when choosing between cumulative and non‑cumulative FDs.
