The differential interest rates based on whether the term deposits are with or without the premature withdrawal facility come to India.

The Reserve Bank of India (RBI) has given green signal to banks to offer differential interest rates on deposits, allowing earning of higher interest rate if one goes for deposit without premature withdrawal facility. RBI said that banks can now offer early withdrawal of term deposits and differential interest rates can be offered to customers if they opt for such a feature. Customers who don't choose early withdrawal of their term deposits can be offered a different interest rate on their deposits.

Currently, banks do not follow any uniform code on whether to charge penalty on premature withdrawal of fixed deposits.

RBI also said that all term deposits of individuals held singly or jointly of Rs 15 lakh and below should have premature withdrawal facility. Besides that banks have been allowed to offer deposits without the option of premature withdrawal as well.

The regulator, however, said that banks which offer such term deposits should ensure that the customers are given the option to choose between term deposits with or without premature withdrawal facility.

Banks have been asked to disclose in advance the schedule of interest rates payable on deposits. They should also have a board approved policy with regard to interest rates on deposits including deposits with differential rates of interest and ensure that the interest rates offered are reasonable and available for supervisory review/scrutiny as and when required, the RBI said.

Banks are expected to announce their differential interest rates on such deposits.

Since January 2013, RBI had allowed banks to offer such differential interest rates on deposits that were less than, equal to, or over Rs 1 crore.