Fixed deposits

A fixed deposit is a loan to a bank for an agreed period at an agreed rate. Everything interesting is in the rules around that, and most of it is in one RBI direction.

The rate is not yours to negotiate

The framework is unusually prescriptive. Banks must have a board-approved interest rate policy, and:

The rates shall be uniform across all branches and for all customers and there shall be no discrimination in the matter of interest paid on the deposits, between one deposit and another of similar amount, accepted on the same date, at any of its offices.

And then, flatly: "The rates shall not be subject to negotiation between the depositors and the bank."

So haggling over an FD rate is not a skill you are failing to deploy — it is prohibited. Rates must be as per a schedule disclosed in advance, and must be "reasonable, consistent, transparent and available for supervisory review".

The only three grounds for a different rate

Term deposit rates "shall vary only on account of one or more of the following":

Tenor. Banks choose maturities freely, subject to a minimum tenor of seven days.

Size — but only for bulk deposits. Differential rates may be offered only on bulk deposits. An ordinary retail deposit does not get a better rate for being larger.

Absence of a premature withdrawal option. A bank may offer a deposit without the right to break it, and pay more for that. But every term deposit taken from individuals for ₹1 crore and below must have a premature-withdrawal facility — so for a household deposit the option is guaranteed, and a product offering a higher rate for giving it up is not available to you below that threshold.

Read as a list of what is excluded, this is more informative: your relationship with the bank, your balances elsewhere, your willingness to buy another product, and your persistence are all impermissible grounds for a different deposit rate.

Two permitted add-ons

Senior citizens. Banks may, at their discretion, run term deposit schemes for resident Indian senior citizens "offering higher and fixed rates of interest as compared to normal deposits of any size". It is discretionary, not mandatory. It is also not available on a deposit in the name of an HUF or its Karta, even where the Karta is a resident senior citizen — a trap worth knowing if family money is held that way.

Bank staff. Banks may allow one per cent per annum above the schedule on deposits of their own staff and certain executives.

Premature withdrawal: the mechanic people get wrong

This is the most useful paragraph in the chapter.

Interest shall be paid at the rate applicable to the amount and period for which the deposit remained with the bank and not at the contracted rate.

Two things therefore happen when you break a deposit early, and they are separate:

1. Your contracted rate is replaced. You are re-rated to the rate that applied to the period you actually held it. The five-year rate you booked becomes irrelevant.
2. A penalty may then be applied on top of that re-rated figure.

Most people know about the penalty and not about the re-rating, which is why breaking a long deposit is usually worse than expected. The re-rating is normally the larger of the two effects.

On the penalty itself, the direction requires a board-approved policy, and adds a provision worth remembering: "The components of penalty shall be clearly brought to the notice of the depositors at the time of acceptance of deposits. If not, no penalty shall be levied." A penalty that was never disclosed to you up front is not payable.

Two cases carry no penalty: splitting a deposit at the request of a deceased depositor's claimants or joint holders, where the period and aggregate amount do not change; and premature withdrawal following the transfer of a branch's business to another bank.

And if you withdraw before the minimum period — the seven days — no interest is paid at all.

Working the problem

A five-year FD at 7.5%, broken after one year, with the bank's one-year rate at 6.5%.

Step 1 — re-rating. You held it for one year, so you are paid at the rate applicable to that amount and period: 6.5%, not 7.5%. You have already lost 1.0 percentage point on the whole year, and this happens by rule rather than by penalty.

Step 2 — penalty. The bank's disclosed policy then applies a penalty on that re-rated figure. If it is 1%, you receive roughly 5.5%.

So the total shortfall against your contracted rate is about 2 percentage points, of which only half is the penalty. The common description — "you lose a bit of interest as a penalty" — captures step 2 and misses step 1, which is why the outcome feels worse than people expect.

The honest qualification: the comparison against 7.5% is not quite the right one, because you were never going to earn 7.5% over one year. The fair comparison is against what you would have received had you booked a one-year deposit in the first place, which is 6.5% with no penalty. On that basis the cost of having guessed wrong about your horizon is the 1% penalty — and the lesson is about matching tenor to need, not about penalties being unfair.

Which is why the practical advice is to split rather than to commit. Two deposits of half the amount, at different maturities, let you break one and leave the other intact. Chapter 7 generalises this into laddering.

The point

FD rates are set by a disclosed schedule, must be uniform across customers, and cannot be negotiated; they may differ only by tenor, by bulk size, or by the absence of a premature-withdrawal right — which individuals holding ₹1 crore or less are guaranteed anyway. Senior citizen and staff premiums are permitted additions, the first discretionary and unavailable to an HUF. Breaking a deposit early re-rates you to the rate for the period actually held and only then applies a penalty, so the loss is larger than the penalty alone — and an undisclosed penalty cannot be charged at all.