RBI’s Fixed Deposit Rules
In the last few years, the Reserve Bank of India (RBI), introduced significant amendment to rules relating to fixed deposits. Such amended rules have an impact on majority of the population of the country.
Fixed Deposits or Term Deposits
Fixed deposit is an important mode of investment /saving. A fixed principal amount remains deposited in a bank in the name of the customer on which interest is earned. Usually, the rate of interest is prefixed and so is tenure or period of maturity. The customer can give standing instructions to the bank on ways to deal with the interest – either re- credit the interest accrued to the principal amount or pay out the accumulated interest at the end of the tenure / maturity period or auto renew the fixed deposit itself.
The tenure of investing in FDs is a minimum of 7 days up to a maximum of 10 years across banks in India.
The RBI changed rules relating to interest on Fixed deposits, in particular the interest rate on those FDs which have matured but not claimed.
Prior to 2021, if an FD matured and the customer did not claim it or withdraw it, then the Bank would extend the FD for the same period that the original FD was invested in. The interest rate was also the same as that of the original FD.
In 2021, the RBI has altered the rule relating to interest on FDs which are overdue. Overdue FDs are those which have matured but not been claimed or withdrawn by the customer.
RBI issued an order that if an FD matures and the amount is not claimed or withdrawn, then the interest rate on such FD shall be as per the savings account OR the rate of interest on the matured FD whichever is lesser.
In cases of overdue FDs, the interest rate accrued on the original FD will not be available. A reduced rate of interest will be applicable. The interest rate that accrues on the savings account will be applicable for overdue FDs. Obviously, this rate is lesser than the rate of interest.
Let us say a customer has invested a sum of Rs. 2 lakhs in a fixed deposit for a period of 3 years at interest rate of 7% per annum. At the end of 3 years, when the FD matures, the customer withdraws it and gets interest @ 7% per annum for 3 years.
In case where the customer did not withdraw the amount after maturity or give any instruction to the bank for automatically renewing (‘auto renew’) the amount on maturity, then:
Under the old rules: the Bank would extend the FD for the same period as original FD and pay interest as in case of the original FD. So, in the illustration, if the FD was not claimed after 3 years, then the Bank would extend the FD by another 3 years with interest @ 7% per annum.
Under the new rules effective 2nd July 2021: the RBI has indicated that this would not happen. If the FD was not renewed on maturity, then the interest on such FD, after the maturity period would be interest as per savings account or interest on FD, whichever is lesser.
Continuing the illustration, if the interest on savings account is 3 % and interest on FD is 7% then the lesser of interest rate of interest i.e, 3% would be paid.
Points to be kept in mind:
- These rules are applicable to FDs in all banks –
a. Scheduled Commercial Banks (including RRBs)
b. Small Finance Banks
c. Local Area Banks
d. All Primary (Urban) Co-operative Banks/ District Central Co-operative Banks/ State Co-operative Banks
- The revised (lesser of the two) interest rates on FDs will not apply if instructions such as ‘auto renew’ have been given by the customer with respect to the FD.
- The notification shall does not imply that ‘auto renew’ is not possible. It is applicable for the period after the maturity if the FD is unclaimed or not withdrawn.
Fixed deposits or term deposits are considered one of the safest options of investment undertaken by all sections of the society. With least risk to principal amount, consistent return and concession on tax and TDS for senior citizens, it is a preferred option in the investment portfolio of any investor. Citizens are urged to either renew their deposits or withdraw them on maturity to reap maximum benefits.