Recently, fixed deposits (FDs) have become a popular investment option due to rising interest rates. While making an FD, you can choose the tenure of your FD based on your financial goals. Later, when the deposit reaches its maturity date, you have two options: withdraw the funds along with the interest earned or renew the deposit for another term.

Now, if you fail to choose either of these two options, it becomes an "overdue fixed deposit". This type of FD remains dormant with the bank and does not earn interest at the contracted rate. This negatively impacts your overall returns and eventually leads to interest loss. In this article, let’s understand what interest you earn on overdue fixed deposits and how you can avoid them.

• An overdue fixed deposit occurs when you fail to withdraw or renew your FD after it matures.
• On an overdue FD, you do not earn interest at the originally contracted rate.
• According to RBI regulations, banks must pay interest on overdue FDs based on the lower rate between the savings account interest and the matured FD's original rate.
• To prevent an FD from becoming overdue, you can set maturity instructions when opening the deposit.
• These instructions guide banks as to what they should do upon maturity.

It must be noted that when an FD matures, the bank is no longer required to pay the agreed interest rate. At the end of the term, the FD either needs to be “withdrawn” or “renewed”. If you do not act, the FD becomes overdue. At this point, the bank will not continue paying the original interest rate that was agreed upon for the deposit. Instead, the bank offers a lower interest rate, which is calculated as per the rules set by the Reserve Bank of India (RBI).

In 2021, the RBI issued guidelines stating that for overdue fixed deposits, the bank must pay the lower of these two interest rates:

• The savings account interest rate or
• The interest rate of the matured FD

So, if your FD matures and you don't renew or withdraw the amount, the bank will calculate the interest using the above rule. Let’s understand better through an example:

Say you deposit Rs. 50,000 in an FD at 8% for one year. By the end of the year, your FD will mature, and the total amount will be Rs. 54,000. Now, if you leave this amount overdue for another year, and the savings account interest rate at that time is 4%, the bank will apply the lower rate (4%) to the Rs. 54,000. In this case, you would earn Rs. 2,160 as interest for the overdue period instead of the 8% you initially received. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.60% p.a.

To prevent an FD from becoming overdue, you must either withdraw or renew the deposit before it matures. An overdue FD occurs only if you fail to take action when the deposit reaches its maturity date.

If you created your FD offline, you need to visit the bank branch to handle the withdrawal or renewal. Whereas, if you have used your bank’s mobile application to create an FD, you can easily manage it online.

To avoid this situation, even many banks now allow customers to set “maturity instructions” when they open their deposits. By setting these instructions, you can specify what should happen once the FD matures. Commonly, these instructions are:

• Renew the FD for the same tenure at the applicable interest rate or
• Close the FD and credit the principal with interest to my savings account.