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With growing interest rates, fixed deposit (FD) investments are an excellent strategy to build wealth. The coolest thing is that fixed deposits have a variable tenure, so one can earn handsome returns by placing deposits for long, mid, and short terms. However, when a fixed deposit account matures, an individual has two options: either withdraw the money and collect the maturity amount or renew the deposit for the desired term. However, if one fails to execute one of the two alternatives, the FD will become overdue and the account will stay inactive with the bank, and the interest rate will be influenced in the same way.
The Reserve Bank of India (RBI) issued a guideline on overdue deposits on July 2, 2021. Whenever a term deposit (TD) matures with no proceeds, the amount left unclaimed with the bank would earn the rate of interest applicable to savings accounts or the stipulated rate of interest on the matured deposit account, whichever is lower, according to an RBI guideline.
RBI says “If a Term Deposit (TD) matures and proceeds are unpaid, the amount left unclaimed with the bank shall attract rate of interest as applicable to savings account or the contracted rate of interest on the matured TD, whichever is lower." The proposed regulation would apply to all deposit accounts maintained with Scheduled Commercial Banks, Small Finance Banks, Local Banks, Primary (Urban) Co-operative Banks/ District Central Co-operative Banks/ State Co-operative Banks, according to the RBI announcement.
It is well known that savings accounts pay lower interest rates than fixed deposits, and owing to RBI guidelines, an overdue deposit will be charged interest at the same rate as the bank's savings account. Consider the following scenario: a customer opens a fixed deposit account with State Bank of India (SBI) with a deposit of ₹5000 for a term of 5 years and up to 10 years. Based on the current interest rate of 5.5 per cent, the total invested sum of ₹5000 will generate a maturity amount of around ₹6,570 after 5 years.
Now, if the maturity amount is not withdrawn or renewed, the interest rate applicable on the maturity proceeds held with the bank will be 2.70 per cent, because the contracted rate is higher than the interest rate on SBI's savings account, and RBI says that interest as applicable to savings accounts or the contracted rate of interest on the matured TD, whichever is lower, will be applied on overdue FDs, and in this case, the savings account rate is lower than the contracted rate of interest.
To avoid receiving lower interest rates on a fixed deposit's maturity amount, it's advisable to either renew it or withdraw the amount as it matures. Customers who created fixed deposit accounts with the bank offline may encounter difficulties since they must visit the bank to operate with the maturity account. It is advisable to create a digital fixed deposit account in today's scenario, and practically all banks now provide this alternative to their customers. When you create a digital fixed deposit account, you will receive a notification when your account matures, and you may choose to have the maturity proceeds automatically transferred to your savings bank account or to have your FD automatically renewed depending on your own financial goals.