Types of Fixed Deposits – Cumulative FD and Non-Cumulative FD

Fixed deposits have been instrumental in saving the money of millions of people all over the country. People see it as an effective way of saving and investment which can come in handy in the future. Many have changed their fate through such investments. Fixed deposits are primarily a financial mechanism provided by financial institutions which offer investors a higher rate of interest than regular savings account until its maturity date.

Considered as safe investments, fixed deposits have various benefits which makes them a preferred option for investment. Some of the benefits of fixed deposits are as follows:

  1. Assured returns
  2. The higher rate of returns
  3. Risk management instrument for long-term financial goals
  4. Flexible in nature
  5. Easy withdrawal
  6. Encourages the habit of saving

These were some of the benefits of fixed deposits among others. There are many types of fixed deposits and investment schemes such as Cumulative and Non-Cumulative FD.

The Different Types of Fixed Deposits

Banks and NBFCs offer various types of fixed deposits which the investors can select according to their investment requirements. Given below are the significant types of fixed deposit:

Regular Fixed Deposit

Investors deposit their cash for a fixed period also known as tenure. Tenure in this type of fixed deposit can range from 1 week to 10 years. Accordingly, it is termed as a short-term investment, medium-term investment, and long-term investment. The rate of interest is fixed depending on the tenure and the financial institution. But the rate of interest in regular fixed deposits is higher than the interest rate of the savings account.

Tax Saving Fixed Deposit

In this type of FD, the principal amount of the fixed deposit gets a tax exemption of up to Rs.1,50,000 in a year. The investment money is locked up for 5 years. Investors cannot withdraw the funds before the maturity date in tax-saving FD.

Senior Citizen fixed deposit

As the name suggests, this type of senior Citizen fixed deposit scheme is for the people who are above the age of 60 years. Senior citizens can earn an additional interest rate depending on the financial institution. Some rates of interest are 0.35% or even 0.50% higher than the interest rates on the regular deposit.

Fixed Deposit Types

Having known the different Types of Fixed Deposit in brief, here they are in detail.

Regular fixed deposit

Investors deposit money with the financial institution for a fixed tenure which gives them an interest rate on the funds deposited. On maturity, investors get the principal amount along with the interest money.

Investors are not allowed to remove the money from the fixed deposit until its maturity. But, if the need arises to withdraw money from the fixed deposit, the financial institution charges a penalty of 0.5% -1% lower interest on the fixed deposit. The interest can be compounded monthly, quarterly (most common), half-yearly, and annually.

Flexi Fixed Deposit

Also, known as sweep-in sweep-out FD in this type of fixed deposit the investor’s deposit is linked to the savings bank account. In Flexi-fixed deposit, money is swept into the FD to earn a higher interest rate and swept out from the savings bank account in time of need.

The excess balance of a specified amount is automatically transferred to the FD account. It can thus, earn a higher rate of return.

Also, if the investor wants to withdraw cash and if there is insufficient funds in the savings account, the balance of the FD is used to meet the shortfall and to honor the debit. The remaining balance in the FD continues to earn higher interest at the original rate. The investor can thus enjoy the high returns of fixed deposits and also the liquidity of the savings account.

Know about the Best Fixed Deposit Interest Rates

Five-year Tax Saver Fixed Deposit

In this type of FD, under section 80C, investors can enjoy a deduction of INR 1,50,000 a year. It is non-callable and therefore, investors cannot break the fixed deposit for 5 years. The interest paid on maturity of the FD is taxed as per the income tax slab the investor falls under. One cannot pledge this FD nor avail an overdraft facility or loan against it.

Cumulative and Non-Cumulative Fixed Deposit

The 2 major kinds of fixed deposit investment schemes under which all the types of fixed deposit come are cumulative fixed deposit and non-cumulative fixed deposit. Given below are the details of each scheme.

Cumulative Fixed Deposit

Interest is compounded quarterly in cumulative FD and paid at the time of maturity along with the principal amount. This is like a money multiplier as it helps the corpus grow by saving a significant amount. Therefore, this type of fixed deposit works best for those seeking to preserve and increase their savings.

Non-Cumulative Fixed Deposit

Interest is paid quarterly, monthly, half yearly or yearly as per the investors choice in non-cumulative FD. Here, the regular interest payouts can be used to meet the daily expenses. Therefore, non-cumulative fixed deposit is suitable for people who require periodic interest payments like the pensioners.

When it comes to the debate of cumulative vs non-cumulative fixed deposit, each has its own pros and cons according to the investor’s requirement.

Cumulative FD

Non- cumulative FD

InterestCompounded interest reinvested with the principal amountInterest payable at fixed frequencies
SuitabilityPeople seeking to save and grow their savingsPeople seeking regular income such as the pensioners
ReturnsOffers a higher returnOffers a lesser return than the cumulative FD

Both have their own advantages, and when it comes to cumulative vs non-cumulative fixed deposit, each is dependent on the investor’s reason for investing money. To make this task easy, investors can calculate the maturity amount and interest earned by using the fixed deposit calculator. Input details such as the principal amount, interest rate, tenure, and deposit option (cumulative or non-cumulative) to get results quickly and accurately. Use this tool to figure out the investment options which suits the most and start investing.