Did your bank FD auto-renew at a lower interest rate? Here’s how to handle it

When an FD is auto-renewed, the new interest rate may be lower than the previous one. Customers can contact the bank to request a reversal, though approval will depend on the bank’s terms and conditions.

For those who hold Fixed Deposits (FDs) with a bank, the interest rate is of great importance. Many people opt for the auto-renewal facility for their FDs to keep their funds secure while continuing to earn interest.

Often, upon the maturity of an FD, the bank automatically renews it—frequently at a lower interest rate than before. This can lead investors to feel that their earnings have decreased. If this has happened to you, you might wonder: can an auto-renewed FD be reversed, and is it possible to get the original interest rate back?

Can an auto-renewed FD be reversed?

If your FD has been auto-renewed at a lower interest rate, you still have the option to close it. However, you must follow the bank’s rules. Withdrawing funds before the maturity of the new FD may attract a premature withdrawal penalty. Typically, banks may deduct 0.5% to 1% from the applicable interest rate if an FD is closed before its maturity date. The exact penalty depends on the bank’s policy and the specific terms and conditions of the FD.

What happens when an FD matures?

When an FD reaches the end of its tenure, the bank either pays out the funds or reinvests them, based on the instructions previously provided by the customer. If the customer has opted for auto-renewal, the bank may create a new FD using the maturity proceeds.

It is important to note that the new FD is not guaranteed to carry the same interest rate as the previous one. Banks typically apply the interest rate in effect at the time of renewal. Therefore, if banks have lowered their fixed deposit (FD) interest rates in the interim, the new deposit may yield a lower return.

What happens if the funds are not withdrawn upon maturity?

If an FD is neither withdrawn nor renewed after maturity, it is not guaranteed that the original interest rate will continue to apply. According to RBI guidelines, the interest payable on such an unclaimed deposit may be the lower of the two: the interest rate applicable to a savings account or the contracted interest rate of the matured FD.

Furthermore, if an individual does not claim their FD funds for 10 years after maturity, the amount is transferred to the RBI’s Depositor Education and Awareness (DEA) Fund. To recover such funds, one can locate the FD via the RBI’s UDGAM portal and file a claim with the respective bank. It is, therefore, advisable to check the auto-renewal terms before opening an FD and to keep track of the maturity date to avoid having your funds reinvested at a lower interest rate.

Can you request a reversal from the bank?

If your FD has recently been auto-renewed, it is best to contact your bank branch immediately. You can explain your situation to the bank manager and request a reversal of the new FD.

In certain cases, banks may offer special relief depending on the customer's circumstances. However, restoring an FD to its previous state depends entirely on the bank’s internal policies and their approval. Consequently, the sooner you contact the bank, the better.