FD rules tweaked: Premature withdrawals allowed for deposits up to Rs 1 cr

Have you parked your excess cash in a fixed deposit? You can now prematurely withdraw deposits of up to Rs 1 crore as the Reserve Bank of India has raised the minimum amount for offering non-callable term deposits to Rs 1 crore from the current Rs 15 lakh. 

A fixed deposit is generally a deposit scheme where an amount or the whole amount can be withdrawn by the account holder prior to the maturity date of the deposit. In other words, all the fixed deposits which allow premature withdrawals are called callable deposits. Banks may charge some amount of money as a penalty for withdrawing the amount before maturity. However callable fixed deposits do not have any lock-in period. 

Non-callable fixed deposits simply don’t have any lock-in period. The amount that an investor invested in this product can’t be withdrawn before the date of maturity with the exceptions that include Bankruptcy of the account holder, winding up of business, orders by, in the case of death, etc. Also, the minimum amount for the deposits is supposed to be much higher compared to callable deposits. They have a higher premium rate of interest since the funds are blocked for the period of maturity.

For instance, the funds of the depositor are blocked for the predetermined period of the FD. If the depositor who bought these non-callable fixed deposits has a maturity period of five years and in the second year he or she found a better investment opportunity where he or she can certainly make better returns than the interest given by the bank through the non-callable fixed deposit, she will not be able to withdraw her funds.

 One of the key advantages is that depositors tend to earn a higher rate of interest.  Since the amount is locked, one can lock the deposits at a higher rate without worrying about the fall in rates at a later stage.

The disadvantage is that since these deposits have a lock-in period, one can’t use the money even if there is some emergency such as job loss, etc. When there is an opportunity to earn a higher return from equity because of the radical change in market movement, you can't deploy this money elsewhere since it is locked in a fixed-income instrument.

What the RBI said

"On a review, it has been decided that (i) the minimum amount for offering non-callable TDs may be increased from Rupees fifteen lakh to Rupees one crore i.e., all domestic term deposits accepted from individuals for amount of Rupees one crore and below shall have premature-withdrawal-facility and (ii) these instructions shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits," the RBI said in a notification on Thursday.

Banks shall have the freedom to offer term deposits without premature withdrawal option provided that all term deposits accepted from individuals (held singly or jointly) for an amount of Rs 1 crore and below shall have premature-withdrawal-facility.

This circular applies to all commercial banks and co-operative banks," the central bank said.

These instructions shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Ordinary Non-Resident (NRO) Deposits.


What this means

As per the latest RBI circular, all term deposits accepted by banks from individuals (held singly or jointly) for Rs  1 cr and below shall have premature-withdrawal-facility compared to the earlier threshold of Rs 15 lakh.

"Investors with term deposits between Rs 15 lakh to Rs 1 crore can now prematurely withdraw their term deposits. For example, if an investor wants to book a term deposit of Rs 20 lakh with a premature withdrawal facility, they can do so. Earlier, for such investments, they would have to split the corpus into multiple smaller FDs. So, the investors have more freedom to use FDs for their debt investments," said  Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.

 

RBI has also enhanced the bulk deposit limit for regional rural banks to Rs 1 crore from Rs 15 lakh.