Cumulative vs Non-Cumulative FD: Monthly Payout or Maturity?

When you book an FD, the bank form has one small box that most people tick without thinking: "interest payment". Cumulative, monthly, quarterly. The bank RM usually asks "payout chahiye ya maturity pe?" and moves on. That one tick decides whether ₹10 lakh earns you ₹3.80 lakh or ₹3.25 lakh over five years, at the same rate, in the same bank.

Neither option is a trick. They do different jobs, and the ₹55,000 difference only hurts if you pick the one that doesn't match how the money will actually be used. So this post goes through how each works, why the monthly figure is a little lower than you'd expect and what tax does to both. At the end it fills in that same form for two very different households.

What the interest-payment box actually changes

A cumulative FD (SBI calls it a Reinvestment Plan, other banks say "reinvestment deposit") does not pay you anything till the end. Every quarter the bank calculates your interest and adds it to the deposit. Next quarter, interest is worked out on the bigger amount. At maturity you get one lump sum: principal plus all the compounded interest.

A non-cumulative FD, or payout FD, sends the interest to your savings account as it is earned: monthly, quarterly, half-yearly or yearly, whichever you pick. The deposit itself never grows. Put in ₹10 lakh and you get exactly ₹10 lakh back at the end, with the interest already paid out along the way.

Same bank, same rate card, same safety. Only what happens to the interest changes.

How the payout options work, and why monthly pays a bit less

Indian banks normally compound FD interest every quarter. So quarterly payout is the "natural" version: the bank pays you the quarter's interest instead of adding it back. On ₹10 lakh at 6.5%, that is ₹10,00,000 × 6.5% ÷ 4 = ₹16,250 every quarter. You can see that number on the FD calculator by setting the tenure to 0.25 years.

Monthly payout is where people get confused. 6.5% divided by 12 should be ₹5,417 a month. The bank pays about ₹5,388. SBI's own fixed deposit page says it plainly: interest on monthly intervals is paid "on discounted rate".

The reason is fair, not sneaky. If the bank paid ₹5,417 every month, you would get ₹16,250 by the end of the quarter, but you would get part of it a month or two early. Money in hand earlier is worth more. So the bank works out the monthly amount that is equal in value to ₹16,250 at quarter-end. The usual way of doing it:

Monthly interest = Deposit × ((1 + r ÷ 4)1/3 − 1)

At 6.5% that works out to ₹5,387.59 a month on ₹10 lakh, which is like getting 6.47% a year paid monthly instead of 6.5%. ICICI Bank's own example of ₹1 lakh at 6.60% showing ₹547 a month instead of ₹550 is this same formula at work. Your bank's figure may differ by a rupee or two because of rounding.

Some lenders print a separate, lower rate for the monthly option; others just say "discounted value". Compare the actual rupee payout either way.

₹10 lakh for 5 years: what each option pays

Take ₹10 lakh in a big bank at 6.5% for five years. (Big banks are paying roughly 6–6.5% right now, small finance banks around 7–8%. RBI raised the repo rate to 5.50% on 7 October 2026, so cards may inch up. Check the current one.)

The cumulative figure comes straight from the FD calculator: ₹13,80,420 at maturity, an effective yield of 6.66% a year. The payout figures are simple multiplication (20 quarters of ₹16,250, or 60 months of ₹5,387.59). That effective yield is also why comparing banks on the headline rate alone can mislead: 7% compounded quarterly is a 7.19% effective yield, and two cards showing the same rate can pay differently depending on compounding and payout terms.

Stretch it to ten years and the cumulative FD earns ₹9,05,559, while quarterly payout earns ₹6,50,000. A gap of about ₹2.56 lakh. Compounding gets louder with time.

For smaller amounts, per ₹1 lakh at 6.5%: about ₹539 a month, ₹1,625 a quarter, or ₹1,38,042 at the end of five years if you go cumulative.

Where the ₹55,000 gap really comes from

Looking at that table, it is easy to think the payout FD "loses" ₹55,420. It doesn't. The gap is interest on interest, and it only goes missing if your payouts go missing.

Here's the check. Take each ₹16,250 quarterly payout and put it straight back in at 6.5%, compounded quarterly. After five years the total comes to ₹3,80,420, exactly what the cumulative FD gives. Do the same with the monthly ₹5,387.59 at its monthly-equivalent rate and you land on the same ₹3,80,420 again. So the bank is not charging you anything for the payout option. A cumulative FD is just a payout FD where the bank does the reinvesting for you, at the full FD rate, automatically.

Now the real-life version. Most people's payouts land in a savings account and sit there. SBI pays 2.5% on savings. Leave those quarterly payouts in the savings account for five years and they grow to roughly ₹3,45,000, about ₹35,000 less than the cumulative FD. If the money gets spent on random things, you have nothing extra at all.

So the question isn't "which pays more". It's "will I actually use or reinvest the interest?" If yes, the payout costs you nothing. If it just sits in the savings account, cumulative wins.

Tax and TDS: same rate, different timing

Tax doesn't care which box you ticked. FD interest is added to your income and taxed at your slab rate, every year. With a payout FD that feels obvious, because the money arrives in your account. With a cumulative FD, people often assume tax is due only at maturity. It isn't. The interest is taxable each year as it accrues, even though you see nothing till the end. The bank reports that accrued interest anyway, so it sits in your AIS every year. Leaving it out of the ITR because "I haven't received it yet" just creates a mismatch.

In the 30% slab (31.2% with cess), tax on the ₹3,80,420 of cumulative interest comes to about ₹1,18,691 over five years. On the payout FD's ₹3,25,000 it is ₹1,01,400. Same rate. The cumulative one pays more tax only because it earned more interest. For a retiree in a low slab, or with no tax at all, the tax angle mostly goes away. Check your own slab on the income tax calculator.

TDS works the same way for both: the bank cuts 10% once your interest from that one bank crosses ₹50,000 in a tax year, or ₹1 lakh for senior citizens (section 393 of the Income-tax Act, 2025). Without PAN, it's 20%. On a cumulative FD the bank works out TDS on the interest accrued each year, so the maturity amount can come in a little lower than the calculator shows.

One quirk worth knowing. Interest on a cumulative FD grows every year, because it is earned on a bigger balance. Payout interest stays flat. Say a senior citizen puts ₹14 lakh in at 7%. As a payout FD it pays ₹98,000 a year, under the ₹1 lakh limit, so no TDS. As a cumulative FD it accrues ₹1,00,603 in year one itself, and more after that, so TDS kicks in. TDS is not extra tax and gets adjusted in the ITR, but it is a nuisance for someone who owes no tax.

If your total tax for the year works out to nil, give the bank Form 121 at the start of the tax year. It replaced Forms 15G and 15H from 1 April 2026. Seniors only need their tax to be nil; those under 60 also need such income within the basic exemption limit. The Income Tax Department's Form 121 FAQs explain it. We go deeper into this in our post on FD interest tax, TDS and Form 121.

What you give up with each

That last row deserves a line. ₹5,388 a month feels decent today. At 5% inflation, after five years it buys roughly what ₹4,220 buys now. The deposit doesn't grow, so the income doesn't either. A retiree living only on payout FDs gets a little poorer every year.

The drawback of cumulative is simpler: the money is out of reach unless you break the FD, and breaking it costs a 0.5–1% cut in the rate at most banks. Breaking a payout FD early has the same penalty, and the bank adjusts interest it has already paid you at the higher rate. Also, don't count on changing your mind halfway. The payout option is usually fixed when you book, and switching can mean breaking the FD and paying that penalty, so ask the bank before you sign.

Goal money, salary money, pension money

The simplest way to decide is to ask what job this particular money has.

If it is goal money, meant for a car in two years, a child's school admission or a house down payment, tick cumulative. You don't need the interest now, and it compounds at the full rate without you lifting a finger.

If you are still drawing a salary, cumulative almost always wins too. A monthly payout on top of a salary tends to dissolve into everyday spending. If what you actually want is the habit of putting money away every month, an RD does that job better than any payout FD.

If it is pension money, the payout box is the whole point. Monthly if your bills run monthly, quarterly if you can manage, since quarterly gets the full rate. The same goes for parents or in-laws you support: a monthly payout FD in their name works like a small pension. Keep their interest within their tax-free limit, and if their tax is nil, file Form 121 at each bank, or the bank cuts TDS that they then have to claim back through an ITR.

Money you might need any day is a different case. For that, a sweep-in FD linked to your savings account is neater than either box: it earns FD interest and you can still pull money out any day.

Working backwards from a monthly income

If you are using FDs as a pension, start with the monthly amount you need and work backwards. Using the discounted monthly formula:

A few practical points:

• Spread it across banks. DICGC insures up to ₹5 lakh per depositor per bank, principal and interest together. ₹45 lakh in one bank means ₹40 lakh isn't covered. If you are chasing a small finance bank's extra 0.25%, keep your total there under ₹5 lakh.
• Stagger maturities. Split the money into FDs maturing in different years, so a rate cut doesn't hit all of it at once.
• Look beyond bank FDs. The Post Office Monthly Income Scheme pays 7.4% monthly (up to ₹9 lakh single, ₹15 lakh joint), and the Senior Citizens' Savings Scheme pays 8.2%, credited quarterly, for October–December 2026. Seniors also get roughly 0.5% extra on bank FDs. Our post on FDs for senior citizens compares these.
• Plan for rising expenses. Flat FD income won't keep up for 20–25 years of retirement. Some retirees keep a part in a mutual fund and draw from it with an SWP; the SWP calculator shows how long such a payout lasts, and the retirement calculator shows how much corpus you need.

Two households, same bank counter, opposite boxes

Picture two households booking FDs at the same branch on the same morning. The first is a retired couple, both past 60, with ₹50 lakh from gratuity, PF and old savings. The house runs on about ₹25,000 a month. At a 7% senior rate, the table above says they need roughly ₹43.1 lakh on monthly payout to get that. So on about ₹43 lakh of FDs they tick monthly. If they could manage on one credit every three months, quarterly would pay about ₹145 a month more on the same money. But the electricity bill, the house help and the medicines all come monthly, and for most retired homes that small gap is a fair price for the convenience.

The remaining ₹7 lakh goes in with the cumulative box ticked. At 7% it grows to about ₹9.9 lakh in five years. That is their answer to the inflation row in the table earlier: after five years of 5% inflation, ₹25,000 buys what about ₹19,600 buys today, and the cumulative FD is what tops up the monthly income, or pays the hospital bill, when that day comes.

For them, the paperwork matters more than the box. They split the deposits between their two names and across a few banks. The ₹1 lakh TDS limit counts all interest from one bank, payout and cumulative together, and the cumulative part grows every year. ₹43 lakh at 7% throws off about ₹3 lakh of interest a year, so with the money split two ways and over three banks, neither of them should cross ₹1 lakh at any single bank. If their total tax for the year is nil, Form 121 goes to every bank at the start of the tax year.

The second is a 35-year-old in the 30% slab who has just got a ₹3 lakh bonus and wants it for a car down payment in three years. He has a salary, so he has no use for another ₹1,616 landing in his savings account every month, which is what monthly payout at 6.5% would pay. He ticks cumulative, and at 6.5% for three years it comes to ₹3,64,022 at maturity.

His one job is the ITR. The interest accrues at about ₹19,980, ₹21,311 and ₹22,731 over the three years. Each year is under the ₹50,000 TDS limit, so the bank cuts nothing, and that is exactly when people forget about it. It is still taxable every year, about ₹20,000 in total at 31.2%, and it shows up in his AIS whether he reports it or not. If the bonus were meant for something five or more years away, it would be worth looking past FDs, and our SIP vs FD comparison is a better place to start.

Same bank, same rate card, opposite ticks, and both are right. Before either of them signs, they should ask the counter for the exact rupee figure, the monthly payout or the maturity amount, and match it against the FD calculator. If the two differ by more than a rupee or two of rounding, ask why before the money leaves the account.

Written by the Gainly team for general information, not as investment or tax advice. Rates and rules change, so check the latest before you decide; tell us if something here is out of date. Contact