Fixed Deposits (FDs) have always been a popular investment option for individuals looking for a safe and secure way to grow their savings. Over the years, various FDs have emerged, each offering unique features to cater to different investor needs. One such type is the Cumulative FD, which has gained significant attention among Indian investors due to its distinct advantages. In this blog, we will explore what Cumulative fixed deposits are, their interest rates in 2023, who benefits from them, and how they differ from Non-Cumulative FDs.
Over the year, Fixed Deposits have emerged as a popular investment option for individuals looking for safe and fixed returns to grow their wealth. Banks, NBFCs and Post Office offer different types of fixed deposit schemes that offer unique features to suit various goals of investors. Fixed deposits are categorised into cumulative and non-cumulative fixed deposits based on the interest amount payout. Both schemes may offer the same interest rate, but the interest payout would be different.
So, based on your investment goals, you can choose to invest in either of the schemes. Let’s have a look at what cumulative fixed deposit is, its features and its advantages.
What is Cumulative FD?
A Cumulative fixed deposit is a type of fixed deposit where the interest earned on the principal amount is not paid out periodically (monthly or quarterly) to the depositor. Instead, the interest is compounded with the principal amount and paid out at the time of maturity. It means that the interest earned in one period becomes a part of the principal for the next period, leading to higher returns at the end of the tenure.
For example, let’s consider two investors, A and B. Investor A opts for a Cumulative deposit of Rs. 1,00,000 for five years at 6.5%, while Investor B chooses a Non-Cumulative deposit with the same principal and tenure. Investor A will receive the principal amount and the compounded interest at the end of five years. But, Investor B would have received periodic interest payouts every year over the five years.
|Year||Investment Amount||Interest Earned||Amount at Year End|
|1.||Rs. 100.000/-||Rs. 6,500/-||Rs. 106.500/-|
|2.||Rs. 106.500/-||Rs. 6,922/-||Rs. 1,13,422/-|
|3.||Rs. 1,13,422/-||Rs. 7,372/-||Rs. 120,795/-|
|4.||Rs. 120,795/-||Rs. 7,851/-||Rs. 1,28,646/-|
|5.||Rs. 1,28,646/-||Rs. 8,362/-||Rs. 1,37,008/-|
|6.||Rs. 1,37,008/-||Rs. 8,906/-||Rs. 1,45,914/-|
Cumulative Fixed Deposit Interest Rate 2023
|SBI Bank||3.00% – 6.80%|
|Bajaj Finance||7.40% – 7.75%|
|ICICI Bank||3.00% – 7.00%|
|HDFC Bank||3.00% – 7.10%|
|Equitas Small Finance Bank||3.50% – 8.25%|
|Axis Bank||3.50% – 8.10%|
|Canara Bank||4.00% – 7.25%|
|Mahindra Finance||7.65% – 7.75%|
|Utkarsh Small Finance Bank Limited||4.00% – 8.25%|
|Shriram Finance||7.34% – 8.10%|
Features of Cumulative FD
1. Compounded Interest
Cumulative fixed deposits offer the advantage of compounded interest. It means that the interest earned is reinvested with the principal amount, allowing your investment to grow at an accelerated pace over the deposit tenure.
2. Fixed Tenure
Unlike other investment options, Cumulative FDs have a fixed tenure. Once you invest your money, the tenure must remain the same, and premature withdrawal may attract penalties.
3. Risk-Free Investment
Cumulative FDs are considered low-risk investments since they are not linked to market fluctuations. They offer stable returns, making them an attractive option for conservative investors.
4. Suitable for Long-Term Goals
Investing in a Cumulative FD is ideal for long-term financial goals, such as buying a house, funding your child’s education, or planning for retirement.
Advantages of Cumulative FD
1. Higher Returns
Cumulative fixed deposits generally offer higher returns than Non-Cumulative FDs, especially when the tenure is long. The power of compounding allows the interest to grow significantly over time.
2. Reinvestment Benefit
Since the interest is reinvested into the FD, the depositor enjoys the advantage of earning interest on interest, leading to exponential growth in savings.
3. Ideal for Long-term Goals
Investors with long-term financial goals, such as buying a house, funding higher education, or planning for retirement, can benefit from Cumulative FDs.
4. Low Risk
Cumulative fixed deposits are considered low-risk investments as they are not subject to market fluctuations and provide assured returns.
5. Tax Benefits
Under Section 80C of the Income Tax Act, of 1961, investments in 5-year Cumulative FDs are eligible for tax deductions, making them a tax-efficient option for some investors.
Who Should Invest in a Cumulative FD?
Cumulative FDs are a suitable investment avenue for various individuals:
1. Risk-Averse Investors
If you seek stable returns without the uncertainty of market fluctuations, a Cumulative FD is an excellent choice.
2. Long-Term Savers
A Cumulative FD provides the advantage of compounded growth over time for individuals with long-term financial objectives, such as building a corpus for a specific purpose.
3. Senior Citizens
Senior citizens often prefer secure and steady investments. Cumulative FDs can offer them financial security during retirement without exposure to market risks.
Documents Required for Cumulative FD
To open an FD account, you will need the following documents:
- Proof of Identity: This includes Aadhar cards, passports, voter IDs, and driver’s licenses.
- Proof of Address: Documents like utility bills, ration cards, or rental agreements prove your residential address.
- Passport-sized Photographs: You must submit a few passport-sized photographs for account opening purposes.
Things to Remember Before Investing in Cumulative FD
Before investing in a cumulative fixed deposit, consider the following points:
- Interest Rates: Compare interest rates offered by different banks to maximise your returns.
- Lock-In Period: Remember that Cumulative FDs have a fixed tenure, and premature withdrawals may attract penalties.
- Tax Implications: The interest earned on Cumulative FDs is taxable as per your income tax slab. Factor in the tax implications before making your investment.
- Interest Payout Frequency: Unlike Non-Cumulative FDs, the interest earned in Cumulative FDs is reinvested. If you need a regular income, you might have better options.
Difference between Cumulative and Non-Cumulative FD
Below is a table highlighting the key differences between Cumulative and Non-Cumulative Fixed Deposits (FDs):
|Difference||Cumulative FD||Non-Cumulative FD|
|Interest Payout||Interest is compounded and paid at maturity.||Interest is paid out at regular intervals (monthly/quarterly).|
|Frequency of Payouts||No periodic interest payouts during the tenure.||Regular interest payouts as per depositor’s preference.|
|Interest Calculation||Interest is calculated on the entire principal amount.||Interest is calculated on the remaining principal after each payout.|
|Returns Growth||Higher returns over the tenure due to the compounding effect.||Returns remain constant as interest is paid out regularly.|
|Suitable for||Long-term investors who can wait for maturity for higher returns.||Investors seek regular income through interest payouts.|
|Interest Reinvestment Benefit||Interest is reinvested, earning interest on interest.||Interest is not reinvested, resulting in no compounding effect.|
|Risk and Volatility||Generally considered low risk and not affected by market fluctuations.||No protection against interest rate changes or market movements.|
|Taxation Implications||Interest earned is taxable but can be tax-efficient for some investors.||Interest earned is taxable based on the depositor’s income tax slab.|
|Lock-in Period||Funds are locked in until maturity to avail higher returns.||No lock-in period; investors can access interest payouts regularly.|
The primary difference between Cumulative and Non-Cumulative fixed deposits lies in how interest is paid to the depositors. As mentioned earlier, in Cumulative FDs, the interest is compounded and paid at maturity, while in Non-Cumulative FDs, the interest is paid out at regular intervals as chosen by the depositor (monthly, quarterly, etc.).
Cumulative fixed deposits are an excellent investment avenue for Indian investors seeking a secure and profitable way to grow their savings over time. The power of compounding and the benefit of higher returns make Cumulative FDs attractive for those with long-term financial objectives. However, investors must carefully assess their financial needs and risk appetite before investing in any financial instrument. Always compare interest rates, terms, and conditions offered by different banks or financial institutions to make an informed decision.