Understand The Difference Between Callable and Non-Callable Fixed Deposit

Introduction

While most Indians are familiar with Fixed Deposits (FDs), not many are aware of their types. In India, there are two categories of FDs – callable and non-callable. While a callable FD offers greater liquidity, a non-callable deposit generally provides better returns. This article outlines the key features, pros, and cons of each so that you can choose the most suitable product for your needs. 

What Is A Callable Fixed Deposit?

A callable FD allows you to withdraw your money before maturity, subject to certain conditions and penalties. These are suitable for people who are content with a reasonable interest rate while retaining the flexibility to access their funds if required. The minimum investment amount is typically as low as ₹1,000, making them ideal for small investors. 

Key Features Of A Callable FD

1. Partial/Premature Withdrawals

The option to withdraw money prematurely can be advantageous during times of financial need. For instance, you may urgently require funds to address a medical emergency. In such cases, callable FDs can come to your rescue. However, this flexibility comes with certain terms and penalties. Generally, the penalty involves a reduction in the interest rate, usually ranging from 0.5% to 1%. Some banks may also charge a fixed fee. 

2. Regular Interest Payouts 

If your callable FD is non-cumulative, you can choose to receive regular interest at your preferred frequency – monthly, quarterly, half-yearly, or annually – as per your needs. That said, the interest rate is usually lower than that of non-callable FDs. 

3. Overdraft Facilities Against FD

Some banks and Non-Banking Financial Companies (NBFCs) also offer loans or overdrafts against callable FDs, up to a certain percentage of the deposit balance. This allows access to funds without breaking the FD and incurring penalties. 

What Is A Non-Callable Fixed Deposit?

A non-callable FD does not allow withdrawals before maturity, except in specific cases. However, in return for locking in your funds, banks or NBFCs usually offer higher interest rates. These FDs are suitable for individuals who are certain about their monetary requirements and will not need the funds for a set period. Non-callable FDs also have a high minimum deposit requirement of ₹1 crore, making them more appropriate for large investors. 

Key Features Of A Non-Callable FD

1. Higher Interest Rates 

Since banks can use the money for a fixed period, they can offer higher interest rates, usually 0.25% to 0.5% more than callable FDs.

2. Stable Funding Source

Non-callable FDs become a stable source of funding for banks, helping them ensure effective asset-liability management. 

3. Suitable For Long-Term Goals

Since there is limited liquidity and the money gets locked, such FDs are best suited for investors who can set aside funds for long-term goals. 

Difference Between Callable And Non-Callable FDs: Side‑by‑side Comparison

How To Choose Between A Callable FD And A Non-Callable FD

You can choose a callable FD if: 

• You want easy access to your funds 
• You have short-term goals  
• You prioritise liquidity over high returns

You can choose a non-callable FD if: 

• You have surplus funds that you won’t need in the near future 
• You want higher returns from your investment
• You have long-term financial goals 

Reserve Bank Of India (RBI) Regulations Related To Non-Callable FDs

Before 2015, all FDs in India allowed premature withdrawals, making them callable. However, such withdrawals disrupted banks’ asset-liability management. To discourage premature withdrawals and encourage long-term investments, the RBI introduced non‑callable FDs in 2015. 

The amount invested in non-callable FDs is locked for a predetermined period and cannot be withdrawn until maturity. However, the RBI permits exceptions in specific situations, such as bankruptcy, a court order, business liquidation, or the account holder’s demise.  

 Taxation, Interest Payouts, And Tenure

• Taxation Of Interest Income

Interest earned on both callable and non-callable FDs is fully taxable under the head ‘Income from Other Sources’. It is added to your total income and taxed as per your applicable slab rate. 

• Interest Payment Frequency

Banks and NBFCs offer both cumulative and non-cumulative FD options. In the case of cumulative FDs, interest is paid only at maturity. For non-cumulative FDs, interest is paid out at fixed, predetermined intervals – monthly, quarterly, half-yearly or yearly. 

• Tenure Options

For callable FDs, the tenure usually ranges from 7 days to 10 years. For non-callable FDs, the minimum tenure is typically one year, and the maximum is generally two to three years, though it can extend to 10 years in some cases. 

Conclusion

FDs remain a popular savings tool among Indian households. While callable FDs offer greater liquidity, non-callable FDs reward you with higher returns. That said, premature withdrawals of callable FDs come with conditions and penalties, whereas non-callable FDs have high minimum investment requirements. Before choosing your FD, you must assess your finances, liquidity needs, investment horizon, and financial goals.

For better financial planning, you can use an FD calculator to estimate your returns based on your investment amount, tenure, and interest rate. You can also compare rates across banks and NBFCs to conduct a thorough comparison for a clearer picture. 

Additional Read: ELSS vs Fixed Deposit: Which is Better for Tax Saving