What is a cumulative fixed deposit?
There is no fixed interest payable over a quarter, half-year or annually in a cumulative FD scheme in that the interest rate is compounded every quarter or year and payable at the time of maturity with the principal.
What is a non-cumulative fixed deposit?
The interest is paid on a quarterly, monthly or annual basis in non-cumulative fixed deposit schemes. Also, the interest earned monthly from your non-cumulative fixed deposits will be taxable. This scheme is most suitable for an individual who is in need of an interest payout periodically.
Cumulative versus non-cumulative FD
There are two types of fixed deposits- cumulative and non-cumulative fixed deposits. There is no fixed interest – half-yearly or every year in a cumulative fixed deposit scheme, i.e, the interest rate is compounded every year and then paid at the end of the tenure. For instance, if you deposit in a financial firm at 10% interest under a cumulative scheme, you will not get interested every month or yearly but only at the end of the scheme tenure. At the end of tenure, the firm will pay the principal amount and accumulated interest. In other words, if you have a fixed deposit for Rs.1 lakh, every year, you can earn an interest of Rs.10,000 (simple rate of interest). At the end of the first year, you will get back Rs. 1.10 lakhs.
Fixed deposit calculator
The fixed deposit calculator gives the return on the principal amount upon quarterly compounding of interest. Also, the effective yield, the return on a fixed deposit depends on the interest rate and the compounding frequency. In India, most major banks do quarterly compounding to arrive at the maturity value of fixed income deposits. To use the calculator, you will have to fill in details such as the following:
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- Principal amount
- Interest Rate
- Period of Deposit
Upon filling up of the above details, you will have to submit the data to get the maturity amount, interest and yield.
For instance, if you have a fixed deposit of Rs. 1 lakh at 8% interest for a period of five years, your total interest receivable will be Rs.48,595. The total maturity amount will be Rs.1,48,595 while the effective yield will be 9.719.
The compounding interest formula(quarterly) is as follows:
A= P (1+r/n)nt
A = final amount
P = principal amount
r = nominal interest rate (as a decimal)
n = number of times interest is compounded (monthly compounding – 12, half-year – 2 and 4 for quarter)
t = number of years