An Azure backup service that provides built-in management at scale.
You are correct. In Azure Backup, the initial backup is a full backup, and all subsequent backups (whether they are daily, monthly, or yearly) are incremental backups. Even though Azure Backup only takes incremental data after day one, it uses an internal architecture that makes every recovery point behave like a full backup when you need to restore.
The monthly and yearly retention points do not mean Azure Backup performs a new full backup on those dates. Azure Backup continues to use the underlying incremental backup chain and retains the recovery point selected for monthly or yearly retention for the longer retention period. For example, if January 31 is selected as a monthly recovery point, Azure does not need to create a separate full backup specifically for January 31. That recovery point is retained according to the monthly retention policy. Similarly, a yearly recovery point is retained for the specified three years.
So conceptually, your policy would be: January 1 = initial backup, January 2 onward = incremental backups, while selected daily/monthly/yearly recovery points are retained for their respective retention periods. The important point is that "monthly backup" and "yearly backup" in the retention policy refer to how long selected recovery points are retained, not that Azure performs a separate full backup each month or year.
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hth
Marcin