Fixed deposits are one of the most popular investment options in India. They are considered to be low-risk investments and offer a guaranteed return on investment. One of the key decisions that investors need to make while investing in fixed deposits is whether to opt for a cumulative or non-cumulative fixed deposit.
What is a Cumulative Fixed Deposit?
In a cumulative fixed deposit, the interest earned on the deposit is added to the principal amount at the end of each compounding period (usually quarterly) and the interest is calculated on the new principal amount. This means that the interest is not paid out to the investor until the maturity of the deposit.
What is a Non-Cumulative Fixed Deposit?
In a non-cumulative fixed deposit, the interest earned on the deposit is paid out to the investor at regular intervals (usually monthly, quarterly, half-yearly, or annually) or at the time of maturity of the deposit. In this case, the interest is not added to the principal amount and is paid out separately to the investor.
Differences between Cumulative and Non-Cumulative Fixed Deposits
– Interest Rate
The interest rate offered on a cumulative fixed deposit is usually higher than that offered on a non-cumulative fixed deposit. This is because the interest earned on the cumulative fixed deposit is reinvested, leading to compounding interest.
– Payout Frequency
In a non-cumulative fixed deposit, the investor receives regular payouts of interest, while in a cumulative fixed deposit, the interest is added to the principal amount and is paid out only at maturity.
– Tax Implications
The tax implications of cumulative and non-cumulative fixed deposits are different. In a non-cumulative fixed deposit, the interest earned is taxable in the year it is received, while in a cumulative fixed deposit, the interest is taxable at maturity.
– Liquidity
Non-cumulative fixed deposits are more liquid than cumulative fixed deposits since the investor receives regular payouts of interest.
Benefits of Cumulative Fixed Deposits
– Higher Interest Rates
Cumulative fixed deposits offer higher interest rates compared to non-cumulative fixed deposits. This is because the interest earned is reinvested and leads to compounding.
– Higher Returns
Since the interest earned is reinvested, the principal amount grows over time, resulting in higher returns at maturity.
– Tax Benefits
Cumulative fixed deposits offer tax benefits since the interest earned is taxed only at maturity. This can be especially beneficial for investors in higher tax brackets.
Benefits of Non-Cumulative Fixed Deposits.
– Regular Income
Non-cumulative fixed deposits offer regular payouts of interest, which can provide a steady source of income for investors.
– Liquidity
Since the interest earned is paid out regularly, non-cumulative fixed deposits are more liquid than cumulative fixed deposits.
– Tax Benefits
Non-cumulative fixed deposits offer tax benefits since the interest earned is taxed in the year it is received. This can be beneficial for investors in lower tax brackets.
Conclusion
In conclusion, both cumulative and non-cumulative fixed deposits have their own advantages and disadvantages. While cumulative fixed deposits offer higher interest rates and tax benefits, non-cumulative fixed deposits offer regular income and greater liquidity. Investors should consider their financial goals, investment horizon, and tax implications before choosing between the two options. It is also important to compare the interest rates offered by various financial institutions and the specific terms and conditions of the deposits before making a decision.
