Everything Above Rs 5 Lakh In Your FD Is Legally Uninsured; Why Indians Overestimate The Safety of FDs?

The belief that fixed deposits are "safe" is one of the most deeply internalised financial ideas in India. It is not learned through balance sheets or policy documents; it is learned through repetition. For decades, deposits matured on schedule, interest arrived on time, and banks appeared stable. Over time, continuity was mistaken for certainty.

But continuity is an observation. Safety is a structure.

Once the structure is examined - legally, institutionally, and mathematically - the idea of fixed deposits as a near-riskless store of wealth begins to fracture. What remains is not an argument against deposits, but a clearer picture of what they actually guarantee - and what they quietly do not.

The legal ceiling most depositors ignore

At the core of the safety narrative is an assumption of full protection. In reality, deposit protection in India is capped.

"Under the framework administered by the Deposit Insurance and Credit Guarantee Corporation, deposits are insured only up to Rs 5 lakh per depositor per bank, inclusive of principal and interest. This limit applies uniformly, regardless of whether the deposit is held in savings accounts, current accounts, or fixed deposits," said Chakravathy V., Confounder & Executive Director, Prime Wealth Finserv.

This is not a theoretical limit. It is a statutory boundary. Any amount above it is explicitly uninsured. Yet household behaviour does not reflect this constraint.

"Over long working lives, families often accumulate balances far exceeding the insured threshold, frequently within a single bank relationship. The perceived safety of the deposit grows with the balance, even though the legally protected portion remains fixed. The mismatch between psychological comfort and legal coverage widens quietly over time," Chakravathy V added.

Evidence that access is conditional, not absolute

The belief in deposit safety is further weakened by recent institutional experience.
In 2019, depositors of Punjab & Maharashtra Cooperative Bank faced prolonged withdrawal restrictions after governance failures were uncovered. In 2020, customers of Yes Bank were subject to withdrawal caps during a moratorium preceding its reconstruction.

"In both cases, depositors were eventually protected to varying degrees, but the assumption that bank deposits guarantee uninterrupted access was decisively broken. Liquidity - not solvency - was the immediate problem. Money existed on paper, but could not be used freely," added Chakravathy V.

These events matter not because they are frequent, but because they expose a structural truth: bank deposits are subject to regulatory processes and timelines. Safety is conditional, not instantaneous.

The larger, quieter risk: real returns

The most consequential weakness of fixed deposits does not emerge during crises. It emerges during normal years.

Fixed deposits promise nominal returns. They make no promise about purchasing power. Once inflation and taxation are accounted for, the distinction becomes unavoidable.

Consider a representative data-driven scenario:

Over recent years, many large Indian banks have offered fixed-deposit rates clustered around 5.5-6.5 per cent for common tenures. For an individual in the higher income brackets, interest income is taxed at marginal rates that can reduce a 6 per cent nominal return to approximately 4.2 per cent after tax.

Over the same period, India's consumer price inflation has frequently averaged 5-6 per cent, with official CPI prints often exceeding post-tax FD yields. When inflation outpaces post-tax interest, the real return turns negative. The depositor's balance increases numerically, but its purchasing power declines.

"A negative real return of roughly 1 per cent per year may appear trivial in isolation. Compounded over time, it is not. Over ten years, purchasing power falls by close to 9-10 per cent. Over twenty years, the erosion approaches 18-20 per cent. These are not hypothetical projections; they are the mechanical outcome of sustained negative real yields," commented Chakravathy V.

The defining feature of this loss is invisibility. Nominal balances grow smoothly. The statements look reassuring. The decline is felt only indirectly - through higher costs, tighter budgets, and diminished flexibility.

Why does time not repair this damage?

It is tempting to assume that such erosion can be corrected later. This assumption misunderstands both compounding and human time horizons.

Losses from negative real returns are asymmetric. Each year of erosion must be offset by future years of positive real returns. But future years are finite, and their availability shrinks precisely when savings matter most.

"The final decade before retirement is disproportionately important. Balances are largest, contributions slow, and time for recovery shortens. If this period coincides with negative real returns - as it often does for deposit-heavy savers - the baseline level of retirement consumption is permanently lowered," stated Chakravathy V.

This is what makes the mistake effectively irreversible for many households. By the time the impact becomes visible, the structural ability to undo it has largely disappeared.

The core misjudgment

The fundamental error is not trusting fixed deposits. It is assumed that nominal certainty equals real safety.

Fixed deposits offer certainty as well as clarity. They reduce volatility. What they do not do - and cannot do by design - is protect purchasing power in all economic environments, guarantee unlimited access, or eliminate institutional limits.

"By treating them as instruments of wealth preservation rather than instruments of nominal stability, generations of savers have overestimated what fixed deposits can realistically deliver. The cost is not sudden loss, but gradual constraint - fewer choices, lower resilience, and diminished financial latitude later in life," commented Chakravathy V.

That is why this is not merely a misunderstanding. It is a slow, data-driven erosion whose consequences compound quietly - and whose reversal, for many, never fully arrives.

Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of Goodreturns.in or Greynium Information Technologies Private Limited (together referred to as "we"). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.