What is the Difference Between a Cumulative and a Non Cumulative Fixed Deposit?

You have often heard the options of a cumulative and a non cumulative scheme in a fixed deposit. Well, have you ever tried asking yourself what the difference actually is.

What is a cumulative fixed deposit scheme?

In a cumulative fixed deposit scheme, there is no fixed interest that is payable over a quarter, half year or every year. For example, the interest rate is compounded every year or every quarter and paid at the end of the tenure.

Let's give you an example. Say you place a fixed deposit in Mahindra Finance at the rate of 10 per cent. If you place the same in a cumulative scheme, you would not get interest every quarter or month or yearly and half yearly, but, at the end of the tenure. The company will add all the interest that has accumulated and pay you the principal amount and accumulated interest at the end of the tenure.

Say, you place a fixed deposit for Rs 1 lakh per year. Every year you should get an interest rate of Rs 10,000 annually on a simple rate of interest. Therefore, if the deposit is placed for one year, you should get back Rs 1.10 lakhs.

What is a non cumulative scheme?

In the example above you can see that the interest is not paid regularly and the Rs 10,000 is paid after the fixed deposit matures. But, in the case of non cumulative scheme the interest is paid every quarterly, annually or every month as the firm may decide. Thus if its is paid every quarter the individual would get an interest rate of Rs 2500 every quarter.

Is a cumulative scheme better than a non cumulative?

It all depends on your own preferences as to which one you would want to choose. Those who need regular income can go in for the non cumulative scheme. On the other hand those who do not require regular cash flows can opt for the cumulative scheme.

Let us give an example. let us say you are a retired individual and need money to manage your daily expenses. In such a case you would always need to go in for a non cumulative deposit. On the other hand, if you have regular income by way of salary or rental or business income, it is better you choose a non cumulative deposit.

Taxation of cumulative and non cumulative deposits

As far as taxation of these deposits are concerned, the same tax laws are applicable. For example, there would be a TDS of Rs 10,000, if the interest income crosses Rs 10,000 in any given financial year. The tax implications do not change at all.

Remember, the only difference between both these deposits is based on the periodicity of interest rates that are made payable. One is paid regularly, while the other is not.

We prefer company fixed deposits for cumulative deposits?

We prefer high quality company fixed deposits for cumulative schemes, simply because they tend to give higher returns than bank deposits. However, you should go for the highly rated AAA rated company deposits, under the cumulative and non cumulative scheme.

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