Money Clarity

Bank FD vs NBFC FD: what the extra interest pays for

An NBFC fixed deposit looks like a bank FD with a better rate, and the rate is usually the only thing compared. The more useful comparison is what stands behind each one. A bank FD is insured by DICGC up to ₹5 lakh per depositor per bank. An NBFC FD is not insured at all, and the RBI states plainly that it does not guarantee repayment of NBFC deposits.

That does not make NBFC FDs a bad idea. It makes the extra interest a price, and it is worth knowing what you are being paid for. In the worked example below, a 1.5-point higher rate on ₹5 lakh for three years earns ₹26,123 more before tax.

This page sets out the rules that protect each kind of deposit and a way to decide whether the extra is enough.

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Last reviewed 2026-11-01

What protects a bank FD, and what protects an NBFC FD

A bank FD is protected twice: by the bank's own strength and by DICGC, which insures deposits up to ₹5 lakh per depositor per bank, principal and interest together. DICGC's guide lists deposits mobilised by NBFCs among what it does not cover.

An NBFC FD is protected by the company's strength alone, plus the RBI's rules on who may take deposits. The RBI requires a deposit-taking NBFC to be registered and specifically authorised to accept public deposits, to hold at least an investment-grade credit rating, to take deposits only for 12 to 60 months, and to pay no more than the ceiling the RBI sets, currently 12.5%. It also says, in its own words, that it does not guarantee the repayment of deposits accepted by NBFCs.

	Bank FD	NBFC FD
Deposit insurance	DICGC, up to ₹5 lakh per depositor per bank	None
Who checks the risk	The bank's regulator and the insurer	You, using the FD's credit rating
Tenure allowed	Set by the bank	12 to 60 months
Rate limit	Set by the bank	RBI ceiling, currently 12.5%
Early withdrawal	Usually allowed with a penalty	Restricted in the first 3 months; see below
Tax on interest	Your slab rate	Your slab rate

Sources: DICGC guide to deposit insurance; RBI's page for NBFC depositors.

Check that the NBFC is on the RBI's list of companies permitted to accept public deposits before you look at its rate
An NBFC FD's credit rating is the main safety information you have. Treat a rating downgrade as news about your money

What the extra interest is worth: a worked example

The technique

Price the extra rate as an insurance premium you are not buying

The difference between the NBFC rate and a bank rate is what the NBFC pays you to carry the risk that a bank depositor hands to DICGC. Putting that difference into rupees, after tax, shows whether the trade is worth it to you.

Sunita has ₹5 lakh for three years. A bank offers an illustrative 7% and a well-rated NBFC an illustrative 8.5%, both compounding annually. The bank FD earns ₹1,12,522; the NBFC FD ₹1,38,645. The NBFC pays ₹26,123 more before tax, or ₹18,286 after tax at a 30% slab.

So Sunita is being paid ₹18,286 over three years to give up deposit insurance on ₹5 lakh. If the NBFC is strong and rated well, and the ₹5 lakh is not her emergency fund, she may decide that is fair. If losing the ₹5 lakh would change her life, no extra rate is.

Sunita's ₹5 lakh for three years, illustrative rates

Bank FD at 7%, insured: ₹1,12,522 interest
NBFC FD at 8.5%, not insured: ₹1,38,645 interest
Extra before tax: ₹26,123
Extra after tax at 30%: ₹18,286

Illustrative rates, annual compounding. Cess ignored for simplicity.

Split rather than choose. Keeping the emergency fund in an insured bank FD and only surplus money in NBFC FDs takes most of the risk out of the higher rate

Getting your money out early

A bank FD can usually be broken early for a penalty set by the bank. NBFC deposits follow RBI rules that took effect on 1 January 2025. In the first three months, a small deposit of up to ₹10,000 can be repaid in full without interest; for other deposits, an individual can take out up to half the principal, or ₹5 lakh if lower, without interest; and in case of critical illness, the whole principal can be repaid without interest. After three months, the NBFC's own premature withdrawal terms apply.

So money you might need soon is better in a bank FD, where breaking early costs a penalty rather than the interest.

Read the NBFC FD's premature withdrawal clause before investing; it is part of the price as much as the rate

Small finance banks: a middle path

Small finance banks are banks, so their deposits are covered by DICGC up to ₹5 lakh per depositor per bank in the same way as any other bank. They often pay more than large banks because they are smaller and newer. For an amount within the ₹5 lakh limit, a small finance bank FD can offer part of an NBFC's extra rate while keeping deposit insurance.

Above ₹5 lakh in one bank, the uninsured part carries the bank's own risk, so the size of the bank matters again.

Keep each small finance bank holding within ₹5 lakh, principal plus the interest it will earn, so all of it stays insured

Choosing between them: a checklist

Five questions settle most cases.

Is this money your emergency fund or needed within a year? If so, keep it in an insured bank FD
Is the NBFC on the RBI's list of companies permitted to take deposits, and what is its current rating?
What is the extra interest worth in rupees after your tax, over the full tenure?
Could you keep it within ₹5 lakh at a small finance bank instead and stay insured?
Have you read the premature withdrawal terms, and could you live with them?

Common questions

Is an NBFC FD safe?

It is as safe as the NBFC. NBFC deposits have no DICGC insurance, and the RBI says it does not guarantee their repayment. The RBI does require deposit-taking NBFCs to be authorised, to hold at least an investment-grade rating and to take deposits for 12 to 60 months, so check the rating and the RBI's list before investing.

Is NBFC FD covered by DICGC?

No. DICGC insures bank deposits up to ₹5 lakh per depositor per bank and lists deposits mobilised by NBFCs among what it does not cover. Small finance bank FDs, being bank deposits, are covered.

Can I withdraw an NBFC FD early?

In the first three months, RBI rules from 1 January 2025 allow full repayment without interest for deposits up to ₹10,000, up to half the principal or ₹5 lakh (whichever is lower) without interest for individuals, and full principal without interest in case of critical illness. After that, the NBFC's own terms apply.

Why do NBFC FDs pay more than bank FDs?

Because they carry risk a bank depositor does not: no deposit insurance and only the company's own strength behind them. In the worked example, a 1.5-point higher rate on ₹5 lakh for three years paid ₹18,286 more after tax at a 30% slab.

A bank FD is insured by DICGC up to ₹5 lakh per depositor per bank; an NBFC FD is not, and the RBI says it does not guarantee NBFC deposits. On ₹5 lakh for three years, a 1.5-point higher NBFC rate earned ₹18,286 more after a 30% slab. Keep your emergency fund insured, check the NBFC's rating and RBI permission, and decide whether the extra is worth the risk you carry.

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Axis Bank