DICGC insurance
Deposit insurance from the Deposit Insurance and Credit Guarantee Corporation covering up to Rs 5 lakh per depositor per bank, including principal and interest across all branches.
In plain language
A bank fixed deposit is described in the workbook as a safe investment option, and the reason it gives is not the bank's reputation. It is deposit insurance.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures each depositor up to Rs 5 lakh. If the bank fails, that much is protected. Anything above it is exposed to the bank's own ability to repay.
For a retiree who keeps a large part of the corpus in deposits, the limit is the whole point: safety is capped, and the cap applies per bank.
How it works
The limit. Rs 5 lakh per depositor per bank, raised from Rs 1 lakh by the notification dated 4 February 2020, under the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
What counts towards it. The workbook is specific:
- All deposits with the bank — not only fixed deposits
- The interest on them as well as the principal
- Held across all branches of the same bank
- Held in the same capacity
So opening a second FD, or using a different branch of the same bank, does not create a second Rs 5 lakh of cover. The limit is aggregated at the level of the bank.
Where it sits among retirement products. Bank deposits have no market risk — they are not marketable and pay a pre-defined amount — and DICGC cover limits the default risk up to Rs 5 lakh. What deposit insurance does not touch is inflation risk. (On re-investment risk the workbook sides with the deposit: a bank fixed deposit "only matures at the end of the term providing compounded return", so unlike a coupon-paying bond it carries no re-investment risk.)
A worked example
Illustrative figures. A retired couple keep their savings at one bank:
| Holding at Bank A, in the husband's sole name | Amount |
|---|---|
| FD at the city branch | Rs 3,00,000 |
| FD at the branch near their old home | Rs 2,00,000 |
| Savings account | Rs 50,000 |
| Interest accrued on the FDs | Rs 20,000 |
| Total | Rs 5,70,000 |
All four are deposits, with the same bank, in the same capacity. Two branches do not make two banks.
Insured = Rs 5,00,000
Not insured = 5,70,000 − 5,00,000 = Rs 70,000
If he moves Rs 1,00,000 of the FD money to Bank B, each bank now holds an amount inside its own limit:
Bank A: 5,70,000 − 1,00,000 = Rs 4,70,000 → fully within Rs 5 lakh
Bank B: Rs 1,00,000 → fully within Rs 5 lakh
Same money, same product, same interest rates — and nothing uninsured. The interest keeps accruing, though, and it counts towards the limit, so an adviser checks the position again as the deposits grow.
Why NISM asks about it
Chapter 2, section 2.10.3 (Bank Fixed Deposits), gives the Rs 5 lakh figure and the aggregation rule, and Chapter 6, section 6.2.1, repeats it in the product profile of bank deposits with the footnote on the 4 February 2020 increase. Expect recall of the limit, of the fact that interest is included, and of the per-bank aggregation across branches.
Common exam traps
- Rs 5 lakh, not Rs 1 lakh. Rs 1 lakh was the earlier limit, raised by the 4 February 2020 notification. Older material still quotes it.
- Principal and interest together. The limit is not Rs 5 lakh of principal plus whatever interest has accrued.
- Per bank, not per branch or per deposit. Holdings across branches of one bank are added up.
- "In the same capacity." Chapter 2 includes this qualifier; the Chapter 6 restatement omits it. Aggregation applies to deposits held in the same capacity.
- Deposit insurance is not inflation protection. An insured deposit is still the product the workbook calls most exposed to inflation risk.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
- Inflation riskThe risk that the money an investment pays out will be worth less in goods and services than expected, because prices have risen — highest in fixed-return products and most damaging to retirees.
- Post Office Monthly Income SchemeA five-year, government-guaranteed post office deposit paying interest every month, with a Rs 1,500 minimum, a Rs 9 lakh single or Rs 15 lakh joint maximum, and no tax benefits.
- Senior Citizens Saving SchemeA five-year, government-guaranteed deposit for those aged 60 or above, capped at Rs 30 lakh across accounts, paying interest every quarter at a rate the government announces quarterly.
- Fixed DepositMoney placed with a bank for a fixed term at an agreed rate of interest. Safe and simple, but the interest is taxable, and TDS applies once interest crosses a stipulated amount.
- Post Office Recurring DepositA five-year post office deposit built from monthly instalments of at least Rs 100, at government-fixed quarterly rates compounded quarterly and paid only at maturity, with no tax benefit.