Non Cumulative Fixed Deposit

A non-cumulative fixed deposit (non-cumulative FD) is a type of investment in which the Interest earned is paid out periodically rather than being compounded and reinvested. In this scheme, the investor receives regular interest payments at predetermined intervals, such as monthly, quarterly, semi-annually, or annually.

What Is Non-Cumulative Fixed Deposit?

A non-cumulative fixed deposit (non-cumulative FD) is a financial product offered by banks and financial institutions where the Interest earned on the deposited amount is paid out to the investor at regular intervals instead of being compounded and reinvested. This means that the Interest earned is not added to the principal amount but paid as a separate income stream. The investor can choose the frequency of interest payments, such as monthly, quarterly, half-yearly, or yearly. As the Interest is paid out regularly, the maturity amount remains the same as the initially deposited sum.

Key Features Of Non-Cumulative Fixed Deposit

Non-cumulative fixed deposits offer several key features that make them attractive to investors seeking a regular income stream:

● Regular Interest Payments: The primary feature of non-cumulative FDs is the periodic payout of interest earnings. Investors can choose the frequency of these payouts, allowing them to receive a steady income stream throughout the investment tenure.

● Fixed Interest Rate: The interest rate on non-cumulative FDs remains constant throughout the investment period, providing certainty and predictability regarding the interest earnings.

● Diverse Tenure Options: Non-cumulative FDs are typically available with tenure options ranging from a few months to several years, allowing investors to choose a duration that aligns with their financial goals and liquidity needs.

● Simple Interest Calculation: The Interest earned on non-cumulative FDs is calculated using a simple interest formula, making it easier for investors to understand and plan their income stream.

Advantages Of Non-Cumulative FD

Non-cumulative fixed deposits offer several advantages to investors, including:

● Regular Income Stream: These FDs provide a consistent and predictable income stream, making them suitable for individuals who rely on regular payouts, such as retirees or those with irregular incomes.

● Liquidity: The periodic interest payouts offer liquidity to investors, allowing them to meet their ongoing financial obligations or expenses without withdrawing the principal amount.

● Tax Planning: The Interest earned on non-cumulative FDs is taxable in the year it is received, which can help in tax planning and spreading out the tax liability over multiple years.

● Low-Risk Investment: Non-cumulative FDs are considered low-risk investments, as they are typically offered by reputable banks and financial institutions and are backed by deposit insurance.

Eligibility Criteria For Non-Cumulative Fixed Deposit

The eligibility criteria for opening a non-cumulative fixed deposit account are straightforward and similar to regular fixed deposits. Individuals, including residents, non-resident Indians (NRIs), and Hindu Undivided Families (HUFs), can invest in non-cumulative FDs. However, they must check their eligibility requirements with the specific bank or financial institution, as they may vary.

How does a Non-Cumulative Fixed Deposit Work?

The process of investing in a non-cumulative fixed deposit is relatively simple and involves the following steps:

● Account Opening: The investor opens a non-cumulative FD account with a bank or financial institution by submitting the required documents and depositing the desired amount.

●Tenor Selection: The investor chooses the investment tenure for the non-cumulative FD, which can range from a few months to several years, depending on the available options.

● Interest Payout Frequency: During the account opening process, the investor selects the desired frequency for receiving interest payouts, such as monthly, quarterly, semi-annually, or annually.

● Interest Calculation and Payout: The bank or financial institution calculates the Interest earned on the deposited amount based on the agreed-upon interest rate and payout frequency. The Interest is credited directly to the investor's designated bank account at the chosen intervals.

● Maturity: Upon maturity of the non-cumulative FD, the investor receives the principal amount back, and the interest payouts cease.

Documents Required For Non-Cumulative Fixed Deposits

To open a non-cumulative fixed deposit account, investors typically need to provide the following documents:

● Identity Proof: A government-issued ID document, such as an Aadhaar card, passport, or driver's license, is required to establish the investor's identity.

● Address Proof: Utility bills, bank statements, or other documents that verify the investor's residential address are necessary.

● Photographs: Recent passport-sized photographs of the investor may be required.

● PAN Card: The Permanent Account Number (PAN) card is essential for tax-related purposes and tracking interest income.

It is advisable to check with the specific bank or financial institution for their exact document requirements, as these may vary slightly.

Cumulative Versus Non-Cumulative FD

To better understand the differences between cumulative and non-cumulative fixed deposits, let's compare them in the following table:

Conclusion

Non-cumulative fixed deposits offer investors a convenient way to earn a regular income stream throughout the investment tenure. By choosing the desired interest payout frequency, investors can receive periodic interest payments, which provide liquidity and help to meet ongoing financial obligations or expenses.