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GlossaryFixed income

Cumulative FD

A fixed deposit that reinvests interest within the deposit and pays principal plus all accumulated interest together at maturity.

In a cumulative fixed deposit, interest is not paid out during the term. It is added to the deposit at each compounding interval — commonly every quarter — and earns interest itself from then on. At maturity you receive the principal and all accumulated interest as one amount.

Why it matters

Because interest earns interest, a cumulative FD ends with a higher maturity value than a non-cumulative FD at the same rate, where interest is paid out and stops compounding inside the deposit. It suits goals with a fixed date — a fee, a purchase, a planned expense — when you don’t need income along the way.

How to read it

  • Effective yield. Quarterly compounding means a 7% stated rate gives an effective annual yield of about 7.19%. Compare FDs on effective yield when compounding frequencies differ.
  • Term and access. The money is committed until maturity; breaking the deposit early usually costs part of the interest.
  • Short tenures. For very short deposits, some banks pay simple interest at maturity. Check the terms.

Common misconceptions

  • “No payout, no tax until maturity.” Interest on a cumulative FD is generally taxable each year as it accrues, and banks deduct TDS on accrued interest above the threshold. Plan for the tax before the maturity date.
  • “Cumulative FDs pay a higher rate.” The rate is usually the same as the payout version; the higher maturity value comes from compounding.

Note: The FD Calculator compares cumulative and payout options for the same principal, rate and term, using a rate you enter.

Formula

Maturity value = Principal × (1 + r ÷ n)^(n × t). Effective annual yield = (1 + r ÷ n)^n − 1

Worked example

For illustration, assume ₹2,00,000 for 5 years at a hypothetical 7% a year, compounded quarterly. The maturity value is about ₹2,82,956, so interest is about ₹82,956. A non-cumulative FD paying quarterly at the same rate would pay ₹3,500 a quarter — ₹70,000 over five years.

Figures are for illustration only — not a forecast or a recommendation.

Related terms

  • Fixed deposit

    A deposit with a bank or finance company that earns a fixed interest rate for a chosen term, with principal and interest due at maturity.

  • Non-cumulative FD

    A fixed deposit that pays interest out at regular intervals — monthly, quarterly, half-yearly or yearly — and returns the principal at maturity.

  • Compounding

    Earning returns on past returns as well as on the original amount, so growth accelerates the longer money stays invested.

  • TDS

    Tax Deducted at Source

    Tax withheld by the payer — an employer, bank or fund house — before paying you, and credited against your final tax for the year.

  • Deposit insurance

    Cover from DICGC, an RBI subsidiary, that protects bank deposits up to ₹5 lakh per depositor per bank if an insured bank fails.