When you open a fixed deposit, you choose not only a tenure and a rate but also what happens to the interest. Leave it in to compound, and you have a cumulative deposit. Have it paid out monthly, quarterly or yearly, and you have a non-cumulative deposit. The choice changes what you receive, and when.
Side by side
For illustration, assume ₹10 lakh for five years at a hypothetical 7% a year, compounded quarterly:
| Cumulative | Non-cumulative (quarterly payout) | |
|---|---|---|
| Interest paid out during the term | None | ₹17,500 a quarter |
| Total interest over five years | about ₹4.15 lakh | ₹3.5 lakh |
| Amount at maturity | about ₹14.15 lakh | ₹10 lakh, plus the final payout |
| Effective annual yield | about 7.19% | 7%, if payouts are spent |
The difference — about ₹65,000 here — is compounding. In the cumulative deposit, each quarter's interest joins the balance and earns interest itself. In the non-cumulative deposit, interest leaves as soon as it is paid.
If you reinvested every quarterly payout at the same rate, you would end with roughly what the cumulative deposit pays. In practice payouts are usually spent or left in a savings account, which is fine if income was the purpose.
Payout frequency
Non-cumulative deposits commonly offer monthly, quarterly, half-yearly or annual payouts. Monthly payouts are often calculated at a slightly discounted rate, because the bank pays you earlier than quarterly compounding assumes. In our illustration, the monthly payout would be about ₹5,800 rather than a straight third of the ₹17,500 quarterly figure. The difference is small but worth knowing when you compare quotes. The FD Calculator shows the schedule for each frequency.
Which suits what
| Need | Usually fits |
|---|---|
| A goal with a date — school fees, a down payment | Cumulative: the full amount arrives when it is needed |
| Supplementing monthly income, for example in retirement | Non-cumulative with monthly or quarterly payouts |
| Regular income plus periodic access to capital | A mix of both — see FD laddering |
| Parking money you will move elsewhere later | Cumulative, to avoid small idle payouts |
Tax: the same for both
A common misunderstanding is that a cumulative FD defers tax until maturity. Under the approach generally applied, interest is taxable as it accrues each year, whether or not you receive it. Banks deduct TDS on accrued interest once your interest with that bank crosses the annual threshold — ₹50,000, or ₹1 lakh for senior citizens — even when nothing has been paid out to you.
For cumulative deposits, this means you may owe tax in years when you receive no cash. Plan for it, especially in higher slabs. See how investments are taxed.
Premature withdrawal
Both types can usually be closed early, subject to the bank's terms. Typically you receive interest at the rate applicable to the period actually held, less any penalty; for non-cumulative deposits, interest already paid out may be adjusted against what you receive. Read these terms when you open the deposit, not when you need the money.
Inflation and fixed payouts
Non-cumulative payouts are fixed for the term. Over a long retirement, a fixed payout buys less each year: at an assumed 6% inflation, its purchasing power roughly halves in 12 years. People relying on deposit income often pair it with assets that have growth potential, or with a systematic withdrawal plan that can rise with expenses. The Inflation Calculator shows how quickly a fixed amount loses value.
Choosing in practice
A few questions usually settle the choice:
- When will I need the money? A dated goal points to cumulative; ongoing needs point to payouts.
- Do I need income now? If not, payouts often end up idle in a savings account.
- What will I do with each payout? If the answer is "reinvest it", a cumulative deposit does that automatically and at the deposit's rate.
- Can my cash flow handle tax on interest I have not received? In higher slabs, annual tax on a cumulative deposit's accrued interest needs to be paid from elsewhere.
- Might I need to break it early? If so, consider a ladder of smaller deposits instead of one large one.
Deposits for parents and senior citizens
Many banks offer senior citizens a higher rate than their standard rate, and the TDS threshold is higher. If a deposit is meant to provide a parent's income, think through in whose name it is held, how nominations are set up and who can operate the account if health changes. Those details matter more in a difficult moment than a small difference in rate.