Cumulative vs non-cumulative FD: same rate, two results

One rate, two shapes

A bank quoting 7% on a five-year FD usually means 7% a year compounded quarterly, so 1.75% a quarter. What you do with that 1.75% each quarter is the only difference between the two kinds of FD:

• Cumulative: it is added to the deposit and earns 7% itself. You receive everything at maturity.
• Non-cumulative: it is paid into your savings account. The deposit stays at ₹1 lakh.

₹1 lakh for five years at 7%

The cumulative FD earns ₹6,478 more, and nothing is hidden there: it is interest on interest. The quarterly compounding lifts the 7% headline to an effective 7.186% a year. (How much compounding frequency is worth is worked through in monthly, quarterly or yearly compounding.)

The payouts are not lost; they earn less

If the payouts sit in a savings account at 3%, compounded quarterly, they grow to about ₹37,610 by year five, still ₹3,868 short of the cumulative FD. Reinvest each payout in a new FD at 7% and the gap closes almost entirely, but that is a lot of small deposits. Spend them and the result is exactly ₹35,000.

So the choice is not about which product pays more. It is about whether you need the money each quarter.

Monthly payouts are slightly smaller

7% ÷ 12 on ₹1 lakh would be ₹583.33 a month. Banks pay less, about ₹580, because paying monthly hands you money before the end of the quarter, and they discount it for that. The exact figure varies by bank, but expect a monthly payout a few rupees below the simple division.

Tax: the cumulative FD's catch

Interest is taxable in the year it accrues, whether paid out or not. With a cumulative FD you owe tax on interest you have not received, and the bank deducts TDS on it each year once the threshold is crossed. In the table above, the effective post-tax picture is the same for both shapes; the cumulative FD simply makes you pay the tax out of other money. How TDS works and how to avoid unnecessary deduction is in TDS on FD interest.

Which to choose

• Cumulative if the money is for a future goal and you do not need income from it. It compounds automatically, which is the whole point.
• Non-cumulative if you live on the interest, typically in retirement. Quarterly payouts earn slightly more than monthly ones, so take monthly only if you need it.
• Splitting across dates helps either way: several FDs maturing in different years let you reinvest at the rates of the day. See how to build an FD ladder.

Reading this

• 7% compounded quarterly is an assumed rate, not a bank offer.
• The savings account rate of 3% is an assumption.
• Tax is ignored in the table and discussed separately.