The magic of compounding is what attracts millions toward structured savings and investments. After all, everyone wants their money to grow steadily and create wealth through dependable instruments. And what better way to do that than through fixed deposits?

Fixed deposits allow investors to park their money for a predetermined tenure with a financial institution. As the term reaches maturity, investors get their principal investment back with interest earned as per the agreed rate and tenure. Therefore, for investors seeking relatively low-risk and predictable returns, fixed deposits have long been a useful investment option.

However, for many new investors, starting with fixed-term deposits can get confusing. Fixed deposit ROI (rate of interest) varies as per the financial institution offering the scheme and the term of the deposit. Furthermore, the two fixed deposit options—cumulative and non-cumulative—can complicate things and make investors more confused.

If you are also wondering whether cumulative or non-cumulative options have the same ROI and which one you should choose, then this piece is for you. Here is a look at both the fixed deposit options and a simplified explanation of cumulative ROI and non-cumulative ROI.

Fixed deposit cumulative rate of interest

Cumulative fixed deposits, as the name suggests, accumulate the total interest to be paid out on the principal amount and pay it on maturity. The interest value at the end of every term unit is calculated on the total amount of principal and interest accrued previously.

For instance, if an investor chooses a fixed deposit option for growing their investment of ₹10,00,000 in a cumulative FD at 7%* p.a. for 2 years, then at the end of the first year they will earn an interest of ₹70,000. Things get interesting after that. This interest amount will get added to the principal amount, making the cumulative investment for the second year ₹10,70,000. In the second year, therefore, they will earn an interest of ₹74,900 (₹10,70,000 x 7%).

Finally, on maturity, they will receive the total amount of ₹11,44,900 against the initial investment of ₹10,00,000 (subject to TDS, as applicable). The additional amount earned in the cumulative option is the result of compounding, not a higher interest rate.

The above examples are illustrative and use a hypothetical interest rate of 7%. Actual interest rates depend on the prevailing rates offered by the financial institution and are subject to change (*T&C apply).

Cumulative fixed deposits are generally suitable for investors who do not require periodic income and prefer to let their investment grow until maturity.

Fixed deposit non-cumulative rate of interest

By comparison, fixed deposits with a non-cumulative rate of interest do not accumulate interest over time. Instead, interest earned on a principal amount is periodically paid out to the investors as per the pay-out frequency selected by them.

For instance, let’s assume a person invests ₹10,00,000 for a tenure of 2 years at 7%* p.a. Under the non-cumulative option, the investor chooses a monthly payout of interest. At 7%* p.a., the investor would earn ₹70,000 every year on the principal investment, making the monthly interest payout ₹5,833 (₹70,000/12).

At the end of the 2-year tenure, they will still get the principal investment of ₹10 lakhs back, having earned ₹1,40,000 of interest in monthly instalments.

Non-cumulative fixed deposits are often preferred by retirees or individuals who require regular income from their investments.

Difference between cumulative and non-cumulative interest

Now, in the above two examples, the ROI was the same but the net interest earned by the investor with cumulative interest option (₹1,44,900) was more than the investor with the non-cumulative interest option (₹1,40,000). This is exactly the point that confuses investors and makes them wonder if the interest rates are the same for both fixed deposit variants.

The key thing to understand here is that the rate of interest is identical in both options for the same tenure. What changes is the treatment of interest. In the cumulative option, interest remains invested along with the principal and continues to earn further interest. In the non-cumulative option, the interest is paid out periodically and does not get the opportunity to compound.

In simple terms, cumulative interest works well when you do not need regular payouts and are comfortable waiting until maturity. It allows the power of compounding to work in your favour, increasing the overall maturity value over time.

On the other hand, non-cumulative interest is structured for liquidity and income planning. Since the interest is paid out at regular intervals, it can help support monthly expenses, supplement retirement income, or provide steady cash flow without touching the principal amount.

Conclusion

In conclusion, cumulative and non-cumulative fixed deposit options offer the same rate of interest for the same tenure, but they serve different financial purposes. The variation in total returns is purely the result of compounding in the cumulative option, not a higher interest rate.

If your goal is to grow your wealth over time and you do not require periodic income, the cumulative option may help maximise your maturity value. However, if you are looking for steady cash flow to meet regular expenses, the non-cumulative option can provide structured payouts without disturbing your principal.

Ultimately, the right choice depends on your financial objectives, liquidity needs, and investment horizon. Understanding this distinction ensures that you select a fixed deposit option that truly supports your personal financial plan.

Shriram Fixed Deposit is accredited with "CARE AAA; Stable” by CARE Ratings; “Crisil AA+/Watch Positive” by CRISIL Ratings Limited; [ICRA]AA+ (Stable)" by ICRA & "IND AA+/Stable" by India Ratings and Research, offers interest rates up to 8.15%* p.a., including an additional 0.50%* p.a. for senior citizens and 0.05%* p.a. for women depositors, along with flexible investment tenures ranging from 12 to 60 months.

Start your investment journey with just ₹5,000. Shriram FD is the convenient choice for every investor.