Fixed deposits are the most popular investment tool in India. Investment in fixed deposits ensures the security of your funds and an interest rate that is higher than other saving schemes. As is clear from the term fixed deposits, it is a term deposit plan where you invest your money for a fixed period at a pre-determined rate of interest. You can choose the tenure of the FD as per your financial needs. The interest rate applicable is pre-determined based on tenure.
Cumulative FD and Non-Cumulative FD
Fixed deposits are available in two variants:
- Cumulative Fixed Deposits: As the name indicates, you can get the interest amount due on your FD at the maturity. No interim interest payments are available during its tenure. At the end of this tenure, the financial institution will pay the accumulated interest along with the principal amount. The cumulative fixed deposits have tenure of a minimum of 6 months to 10 years. Collective FD schemes are therefore called money multiplier schemes.
- Non-Cumulative Fixed Deposits: When you receive the interest on your fixed deposit periodically, such FDs are called non-cumulative fixed deposits. You can choose your convenient mode of pay-out from the options of monthly, quarterly, half-yearly or yearly.
Some Myths about Cumulative Fixed Deposits
Like any other investment schemes, misconceptions and myths surround fixed deposits also. Let us discuss below some of the myths that relate to the cumulative fixed deposits:
- Myth: Only Banks offer Cumulative Fixed Deposits
Fact: Fixed Deposits are provided by banks as well as various Non-Banking Financial Corporations (NBFCs). Financial companies which offer fixed deposits are under the section 58A of the companies act. These companies provide a little higher interest rate as compared to bank deposits.
- Myth: As the number of interest payment increases, more will be the Returns
Fact: The fact is that a Cumulative FD would fetch you more interest amount at the maturity rather than a non-cumulative would bring.
- Myth: You cannot avoid TDS on cumulative FD
Fact: You can avoid TDS on FD interest rate amount by providing necessary documents like 15G and 15H forms. It is more applicable to senior citizens. If your annual interest amount is less than Rs. 50,000 in a financial year, you need not pay the TDS.
- Myth: You need not declare the FD Interest in your tax returns.
Fact: Interest income from FD should be a part of annual tax returns under the head “Income from other sources”.
- Myth: Premature withdrawal facility is not available with cumulative FD
Fact: This facility is available with cumulative FDs on payment of some penalty.
Should investor invest in cumulative FDs?
Cumulative FDs are suitable for long term investments. The rate of interest on a cumulative FD is generally higher than that on a non-cumulative FD. Under the cumulative option, you can invest your funds in tax-saving FDs which have tenure of five-years. The investor planning to invest in cumulative FDs can opt for some alternatives like linking savings account to the FD with the sweep-in facility.