Fixed deposits (FDs) remain a popular savings choice for people who want predictable returns without taking the market-related risks associated with investments such as stocks. However, depositors may have an important question before putting a large amount into an FD: What happens to the money if the bank fails or is unable to repay depositors?
This is where deposit insurance becomes important. In India, eligible bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI).
Under the deposit insurance framework, an eligible depositor is currently covered for up to ₹5 lakh per bank in the same right and capacity. Importantly, this ₹5 lakh ceiling includes both the principal deposited and the interest accrued on it.
So, if you have a ₹10 lakh fixed deposit, it does not mean the entire ₹10 lakh is insured. Understanding how the ₹5 lakh limit works can help depositors make more informed decisions when keeping large sums in banks.
How Much of a ₹10 Lakh FD Is Insured?
Suppose you have placed ₹10 lakh in an FD with one bank. If that bank fails and the conditions for DICGC insurance payout are triggered, the maximum deposit insurance protection is generally ₹5 lakh, subject to the applicable DICGC rules.
The limit is not ₹5 lakh for the principal plus additional protection for interest. Instead, the principal and accrued interest are combined when calculating the insured amount.
For example, if the eligible principal and interest together exceed ₹5 lakh, the DICGC insurance ceiling would still remain ₹5 lakh for deposits held in the same right and capacity with that bank.
The amount exceeding the insured ceiling is not covered by DICGC's ₹5 lakh deposit insurance protection.
Multiple FDs in the Same Bank Don't Automatically Multiply the Cover
A common misunderstanding is that opening several fixed deposits in the same bank will provide ₹5 lakh of insurance for each FD. That is generally not how the insurance limit is calculated.
Suppose a customer has the following deposits with the same bank:
- Savings account: ₹4 lakh
- First fixed deposit: ₹5 lakh
- Second fixed deposit: ₹3 lakh
The total amount deposited is ₹12 lakh. These deposits are generally aggregated for deposit insurance purposes when they are held in the same right and capacity. The depositor does not receive a separate ₹5 lakh insurance limit for every account or FD.
Therefore, simply dividing a large deposit into several FDs within the same bank does not necessarily increase DICGC protection.
What If Your Money Is Kept in Different Branches?
Opening accounts or fixed deposits at different branches of the same bank also does not normally provide a fresh ₹5 lakh insurance limit for every branch.
Deposits maintained across different branches of the same bank are aggregated when determining insurance coverage, subject to the applicable ownership category and capacity.
For instance, keeping ₹5 lakh at one branch and another ₹5 lakh at a second branch of the same bank should not be treated as ₹10 lakh of deposit insurance merely because the accounts are maintained at separate branches.
What Happens When Deposits Are Held in Different Banks?
The situation can be different when deposits are maintained with separate insured banks.
DICGC's insurance limit applies separately to deposits held in different banks. This means that, subject to the applicable rules, eligible deposits at Bank A are considered separately from eligible deposits at Bank B.
This distinction can be important for customers who maintain deposits significantly above the ₹5 lakh insurance ceiling.
However, depositors should understand the rules carefully instead of assuming that every account, FD or branch automatically qualifies for separate coverage.
Principal and Interest Both Count Towards the ₹5 Lakh Limit
Another key point is that accrued interest is included when calculating the insured amount.
Consider a hypothetical case where a depositor's principal is ₹4.80 lakh and the eligible accrued interest is ₹30,000. The combined amount would be ₹5.10 lakh.
Because deposit insurance is capped at ₹5 lakh under the applicable limit, the insurance protection would not increase to ₹5.10 lakh merely because part of the amount represents interest.
This is particularly relevant for long-term fixed deposits, where accumulated interest can substantially increase the total balance.
Check Deposit Insurance Before Choosing a Bank
Interest rates are understandably one of the first things customers compare while opening an FD. But the interest rate should not be the only consideration.
Depositors should also verify whether their bank is covered under the DICGC deposit insurance framework and understand how the insurance rules apply to their accounts.
DICGC insurance generally covers eligible deposits such as savings, fixed, current and recurring deposits with insured banks, subject to applicable exclusions and rules.
Key Point for FD Investors
If you have a ₹10 lakh FD in a single insured bank, you should not assume that the entire ₹10 lakh is protected by deposit insurance. Under the current DICGC framework, eligible deposits are insured up to ₹5 lakh per depositor per bank in the same right and capacity, including both principal and interest.
Multiple accounts, multiple FDs or deposits spread across different branches of the same bank do not automatically provide separate ₹5 lakh covers.
For anyone planning to keep a substantial amount in fixed deposits, understanding these rules is just as important as comparing FD interest rates, maturity periods and premature withdrawal conditions.
