Rs 5 lakh cumulative FD monthly income explained: Returns, tax rules, investment options in 2026

Building a reliable stream of passive income remains a key financial objective for many investors, especially those seeking stability over high-risk returns. In this context, Fixed Deposits (FDs) continue to hold strong appeal, offering predictable income without exposure to market volatility. For investors with a corpus of Rs 5 lakh, an FD can generate steady monthly interest, making it a practical option for meeting regular expenses or supplementing income. However, falling repo rates should also being considered while investing.

The exact monthly payout from a Rs 5 lakh FD depends on factors such as the interest rate, tenure, and whether the deposit is structured as cumulative or non-cumulative. By carefully selecting the right FD variant, investors can align returns with their cash-flow needs while preserving capital.

Explaining the mechanics of longer-tenure deposits, CA Manish Mishra, Founder of GenZCFO, said that a five-year cumulative Fixed Deposit remains one of the most popular choices among conservative investors. “A 5-year cumulative FD is widely preferred because it offers safety and assured returns. In this format, the interest earned is not paid out on a monthly basis. Instead, it is compounded — usually quarterly or annually — and the total amount is paid along with the principal at maturity,” he said.

However, Mishra noted that many investors misunderstand how taxation works for cumulative FDs. “Although the investor receives the money only at the end of the tenure, the interest is taxable every year on an accrual basis. This often leads to confusion, as there is no actual cash inflow during the investment period,” he explained.

For those seeking monthly income, banks and post offices also offer non-cumulative FDs, where interest is paid out at regular intervals such as monthly, quarterly, or annually. While the overall returns may be slightly lower compared to cumulative options, these schemes are better suited for retirees and individuals who rely on interest income for day-to-day expenses.

Annual Tax Liability

The total interest received by banks is calculated yearly, and then they inform the Income Tax Department about it. In case the annual interest is over the limit set by the department, the bank may deduct TDS (Tax Deducted at Source). 
For the majority of banks, TDS is deducted if the consolidated total FD interest surpasses ₹40,000 in a financial year (₹50,000 for seniors). Nevertheless, even if no TDS is deducted, the taxpayer has to report and pay tax on the interest during income tax return filing.

At maturity

The total amount one gets at maturity is made up of the principal plus the interest that has been accumulated. The interest part has already been taxed every year, hence it is not taxed again at the time of maturity—it is conditional on a correct annual declaration.

Key takeaways

A 5-year cumulative fixed deposit carries an annual tax on interest, not on its maturity only. Annual reporting done right will prevent penalties and guarantee that taxes are paid.

1. Do I need to pay income tax every year on a 5-year cumulative FD?

Definitely, the interest generated from a five-year cumulative fixed deposit (FD) is liable for tax every year, regardless of the fact that it is paid only at maturity.

2. Is tax deducted at source (TDS) on cumulative FD interest annually?

Definitely, on an annual basis, banks have the right to take TDS if the accumulated interest crosses the limit set by the tax authorities.

3. When is cumulative FD interest added to income?

The interest on your cumulative FD is treated as if it has been earned each year and is taxed accordingly. It is not taxed at maturity.

4. Is the entire FD amount taxed at maturity?

Certainly, the principal amount remains untaxed, but only that portion of the interest which is declared annually and thus becomes taxable at maturity is subjected to tax.

5. Can I avoid TDS on a cumulative FD?

Absolutely, you can stay clear of TDS by filling out Form 15G or 15H if you fulfil the conditions of eligibility.

Financial experts advise investors to assess their income requirements, tax bracket, and liquidity needs before choosing between cumulative and non-cumulative FDs. With interest rates remaining attractive, a well-structured ₹5 lakh FD can still serve as a dependable pillar in a balanced financial plan.