Most Indians prefer fixed deposits (FD) among all other investment options available. This is due to the multiple upsides it has to offer, such as no market risk, guaranteed returns and flexibility to choose investment terms. Additionally, you also have the option of auto-renewal of fixed deposit in case you do not require the fund once the FD matures.
This blog will focus on FD auto-renewal, different methods of the procedure and more in detail.
Once your fixed deposit matures, you have two options – withdrawal or renewal. If you don’t have anything planned about the maturity amount, you can opt for renewal. The bank will put your FD on auto-renewal at the prevailing rate of interest and for the same term.
Let’s understand this facility with the help of an example.
Suppose you invested Rs. 5 lakhs for a period of 5 years at an interest rate of 7%.
You will receive a total of Rs. 7,07,389, including the interest earned. If you choose FD auto-renewal, the bank will automatically invest Rs. 7,07,389 in another fixed deposit for a period of 5 years. But, the rate of interest would now depend on what the bank is offering currently.
You can also use an FD calculator for accurate and fast calculations of your FD maturity amount and more.
Fixed deposits can be renewed automatically, or the account holder can manually put it into auto-renewal. Here are how the different methods work:
If you choose to manually renew your FD, you can do so by either visiting the bank branch or through the bank’s online portal. You should remember that the FD can only be renewed at the end of its term.
You should be precise about your FD deposits and their maturity date to avoid any mishap. You have to submit an FD renewal application with your bank or NBFC to initiate the process from their end.
You will be given the option to choose FD auto-renewal at the time of opening the FD account. Hence, for convenience, you can click on the auto-renewal option while submitting your FD application form online.
This option is also available if you are applying offline with your bank or NBFC. You will find a checkbox or something similar in the form for the auto-renewal option. Make sure to tick the box for enabling FD auto-renewal before submitting your application.
The following terminologies are essential to have in your knowledge if you are looking forward to the withdrawal or renewal of a fixed deposit:
When you withdraw your FD before its maturity or end of the term, this is known as premature FD withdrawal. The bank or NBFC may levy some charges or penalties against it. Hence, it is recommended to only opt for this option when no other option is available.
This is the ideal situation when you withdraw the entire FD amount, including the interest accrued at the end of the FD tenure. You can also choose to stay invested through FD renewal by submitting an application for the same instead of withdrawing.
If your bank or NBFC automatically transfers the FD maturity amount at the end of tenure to your savings account, this is known as auto withdrawal.
If you wish to keep your FD ongoing for another term, you can reinvest the maturity amount. You can decide the tenure of the investment, and the interest rate will depend on the bank’s current rate of interest.
If you have chosen the auto-renewal option at the time of FD application, the bank or NBFC will automatically reinvest the maturity amount in another FD. The tenure will be the same as the previous FD; however, the interest rate will depend on the prevailing rates.
Auto-renewal of fixed deposit accounts will only be allowed if you give standing instructions to do so to your bank. You can renew the entire FD amount upon maturity by yourself by investing it again in a new FD account. But this can be a tiresome process, especially if you want to open a new FD account in the same bank. This is where the auto-renewal facility helps.
However, it should also be noted that auto-renewing the FD and reinvesting the amount doesn’t make sense if the rate of interest offered is lower than what you were offered before. Once auto-renewed, you can close your FD if you don’t find it favorable, but not without paying a penalty first.
This is why it is better to provide standing instructions to the bank to renew the FD only if you find that the current interest rates are lucrative.
What Will Happen if FD is Not Renewed?
The bank or NBFC won’t renew your FD automatically if you do not choose the auto-renewal option at the time of opening the FD account. The bank will transfer the maturity amount to your linked savings bank account once the tenure ends.
The most common methods of this transfer are Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT). Hence, it can take some time to receive the amount in your account. In case an online transfer fails or is unavailable at the moment, the bank will issue a cheque to you.
In this regard, you should also keep in mind the latest RBI guidelines for FD renewal. It states that if FD proceeds are left unclaimed after the maturity tenure, it will receive the interest rate associated with the savings account or the contracted rate of interest on the matured amount, whichever is lower.
It is important to note that savings accounts usually offer a lower rate of interest than an FD. Hence, if you do not have any immediate use of the FD amount that you will receive upon maturity, you should opt for auto-renewal of a fixed deposit to earn a higher rate of interest.
If you are choosing auto-renewal at the end of a fixed deposit, you should keep in mind the prevailing rate of interest. If the current rate shows a downtrend, you might want to look for other investment options because the returns will not bear any fruit. Auto-renewal is only favorable when the prevailing rate of interest is higher than what you were offered before.