Fixed Deposits continue to appeal to individuals who want predictable returns with lower risk. Many investors compare cumulative and non-cumulative options to choose a plan that suits their goals. One important aspect often missed is how tax deduction at source affects these deposits. Understanding this helps you estimate your earnings more accurately and plan your cash flow with fewer surprises.
What Cumulative and Non-Cumulative FDs Mean
Understanding the structure of each FD type helps you compare their earnings and tax impact with greater clarity.
Cumulative FD
In a cumulative FD, interest is added to the principal at regular intervals. The investor receives the accumulated amount at maturity. This structure suits individuals who do not need a regular income and prefer growth through compounding. The final payout is higher because interest continues to earn interest until maturity.
Non-Cumulative FD
A non-cumulative FD pays interest at chosen intervals. Banks may offer monthly, quarterly or annual payouts. This option works for individuals who want a steady income from their investment. Retired individuals may prefer this format because the income supports monthly expenses.
Why TDS Matters in FD Planning
Tax deducted at source applies to both cumulative and non-cumulative FDs when the interest income crosses the threshold for a financial year. Banks recover tax based on the customer ID. If the total interest earned in a year crosses ₹50,000 for general customers, TDS applies. For senior citizens, the threshold is ₹1,00,000. If PAN and Aadhaar are not linked, the tax rate is higher. If the interest for the year does not cross the threshold, no tax is deducted.
How TDS Works on Cumulative FD
In a cumulative FD, interest does not reach the investor until maturity. However, banks calculate interest at regular intervals. If the interest accumulated in a year crosses the threshold, TDS applies when the interest credit causes the amount to exceed the limit. If the interest remains below the threshold throughout the year, no TDS is deducted during that period.
If the FD matures and the final accumulated interest crosses the threshold, the bank recovers TDS from the payout. When the payable interest is lower than the TDS amount, the remaining tax is recovered from the principal. This ensures full compliance with tax rules.
How TDS Works on Non-Cumulative FD
In a non-cumulative FD, interest is credited at fixed intervals. When the total interest paid in the year crosses the threshold, TDS applies from the payout that causes the limit to exceed ₹50,000 for general customers or ₹1,00,000 for senior citizens. The tax applies only when the cumulative earnings for the financial year cross the limit.
The timing of payouts can lead to earlier TDS deductions compared to cumulative FDs. This happens because interest enters the customer’s account throughout the year. Investors who prefer regular cash flow must be aware that TDS reduces the interest received in later payouts once the threshold is crossed.
Key Differences in TDS Impact
Understanding the distinction between payout timing and aggregate interest helps investors make informed choices.
Timing of Tax Deduction
TDS on cumulative FDs usually applies at maturity or on an interest credit if the accumulated interest crosses the threshold mid-tenure. In non-cumulative FDs, TDS starts applying once the total interest paid in a year crosses the limit.
Impact on Cash Flow
Cumulative FDs often defer tax deduction until maturity. This keeps the interim cash flow unaffected. In non-cumulative FDs, regular payouts may reduce once tax deductions begin.
Interest Reinvestment
Cumulative options reinvest interest. Although TDS reduces the final payout, compounding continues until maturity. In non-cumulative FDs, compounding is limited because interest is distributed.
Premature Withdrawal
If a cumulative FD is withdrawn early, interest is recalculated based on the applicable rate for the actual tenure. Any pending TDS is recovered during closure. In non-cumulative FDs, interest already paid remains taxable for that year. Banks adjust TDS only for the interest yet to be paid.
How Investors Can Estimate Tax Impact
Investors often compare both FD types for return optimisation. A cumulative plan may suit individuals who want long-term growth without interim income. A non-cumulative plan may suit those who prefer a periodic cash inflow. Estimating expected interest for the year helps identify the point at which TDS applies. Filing Form 15G or Form 15H is possible if the projected income stays within the eligible limits.
Investors must also consider whether compounding benefits outweigh the effect of TDS in a cumulative plan. In many cases, compounding still provides stronger long-term value. For non-cumulative FDs, TDS affects the cash received in later intervals, so individuals relying on steady income should plan accordingly.
Using FDs for Tax-Saving
Some FDs qualify for tax benefits under Section 80C when held for the required lock-in period. However, the interest earned on these FDs remains taxable. Section 80C applies only to the principal invested. TDS rules continue as usual for interest.
Which FD Is More Suitable
The suitability depends on the investor’s financial goals.
A cumulative FD is suitable when:
- Long-term growth matters
- Reinvestment aligns with saving habits
- Tax deduction at maturity is easier to manage
A non-cumulative FD is suitable when:
- Regular interest income is required
- Cash flow matters more than compounding
- Tax deduction during the year is manageable
Each option works well in different scenarios. The correct choice depends on the preferred income pattern and tax outlook.
Conclusion
Investors often compare cumulative and non-cumulative FDs for returns, but the tax effect plays an equally important role. Understanding how TDS applies to each format helps you estimate actual earnings and plan your finances with greater accuracy. A cumulative FD concentrates interest at maturity. Therefore, in many cases, TDS may be applied at the end. A non-cumulative FD distributes interest in intervals, which means tax deduction may occur earlier in the year once the threshold is crossed. When comparing both options, consider your cash needs, tax position and long-term financial aim. Making an informed choice helps you use FDs more effectively.