Which FD Is the Better Option: Regular Pay-Out vs Interest on Maturity

Fixed deposits (FDs) are one of the most sought-after savings options in India. Guaranteed returns, high safety of principal and good liquidity are some reasons for its immense popularity. Both banks as well as NBFCs (Non-Banking Financial Companies) offer FDs across different tenors. 

There are various choices available when it comes to how often you would like to receive your fixed deposit interest payments. There are monthly payouts, quarterly payouts, half-yearly payouts, annual payouts or single lump sum payout when your FD matures. The article aims to clear your doubts regarding whether a regular payout or a lump sum payout is better.

In order to answer this question, we first need to understand what a cumulative and non-cumulative fixed deposit is.

A cumulative FD is a fixed deposit in which the interest accumulated on the deposited amount is paid upon maturity to you. The balance amount is compounded every year. This essentially means that you are not only earning interest on the initial principal amount but on the interest as well. You can use an FD calculator to calculate the amount you will be receiving upon maturity. A cumulative fixed deposit is best suited for people who do not rely on interest-earned income. Hence, salaried individuals or self-employed individuals who earn a good salary/income can opt for this type of FD. Individuals who are saving for a long-term goal or do not need regular interest can also choose cumulative fixed deposits. 

Let us try to understand this with the help of an example:

Suppose an individual invests ₹5 Lakhs for a tenor of 5 years in a cumulative FD with a financial institution that pays 8% interest in which the interest is compounded annually. The table below shows how the interest earned reflects on the balance amount every year. In this case, he/she will be getting ₹8,05,256 at the end of 5 years.

On the other hand, when it comes to non-cumulative fixed deposits, the interest is paid out monthly, quarterly, half-yearly or annually. You can choose the payout frequency that suits your financial goals. The interest that is paid out is taxable. You can make use of the free online FD calculator to find out the payout you will be receiving on a periodic basis. If you are looking for a low but steady source of recurrent income, you can consider a non-cumulative fixed deposit.

Let us take an example to understand how non-cumulative FDs function:

Suppose an individual invests ₹5 Lakhs for a period of 5 years in a non-cumulative FD with a financial institution that pays 6% interest on fixed deposits. Since it is a non-cumulative fixed deposit, dividend will be paid out in a predetermined interval. In this case, if he/she wants a payout annually, the total interest will be ₹30,000 per year. This amount is taxable. Over a span of 5 years, ₹30,000 is paid out annually and it is not compounded.

Which Type of Fixed Deposit Should You Choose?

If you are a salaried employee or a small business owner who does not need any additional income to meet your daily expenses, you could opt for the cumulative FD scheme. You can fulfil your long-term goals by saving a huge corpus. 

On the other hand, in case you are an individual who does not have a steady and stable income source, you can choose the non-cumulative FD as it offers payouts on a periodic basis which allows you to plan your finances in a better way. For example, a 1 crore fixed deposit interest per month is ₹66,670 at an interest rate of 8.00%. You can use this money to take care of your monthly expenses.

In comparison to a non-cumulative FD, a cumulative fixed deposit yields larger returns and compound interest. You can choose between a non-cumulative and cumulative fixed based on your long-term financial goals and needs. The main difference between the two is the frequency of interest payout. Non-cumulative FD provides periodic interest payout, whereas a cumulative fixed deposit provides a single payout of lump sum amount.