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Premature FD Withdrawals: How to Withdraw and Penalty Rates?

Updated on: 20 Dec 2023 | 10 min read

Fixed deposits (FDs) have been a go-to investment choice for generations in India, due to their low-risk profile and guaranteed returns. It is a preferred choice for those seeking to invest their savings and earn a fixed interest rate over a specific period. However, situations may arise where you need to withdraw your FD before its maturity date, either to cater to an unforeseen emergency or to invest in a more profitable investment opportunity.

What is the Premature Withdrawal of Fixed Deposits?

Premature withdrawal of fixed deposits, popularly known as breaking an FD, can incur penalties, reduce the interest rate earned on the deposit, and sometimes even nullify the interest entirely. That's why it's crucial to have a clear understanding of the rules, procedures, and penalties associated with breaking a FD prematurely.

In India, banks and financial institutions have different rules and regulations regarding the premature withdrawal of FDs. The penalty or charges for breaking a FD can range from a fraction of the interest earned to the complete loss of interest. Moreover, different banks have different eligibility criteria for the withdrawal of a FD before maturity.

 

This guide aims to help you navigate the process of premature withdrawal of fixed deposits, including the rules and penalties, eligibility criteria, procedure for breaking a FD, and tax implications.

So, if you're considering breaking a FD, this comprehensive guide will equip you with all the information you need to make an informed decision.

How Premature Withdrawal of Fixed Deposits Work?

Fixed deposits offering a premature withdrawal option let you close your account before the term ends. This can be helpful when you are in need of liquidity.


But you need to pay the penalty to the bank for withdrawing the money early. The penalty usually ranges between 0.5 and 1%. However, some banks don't charge a penalty for premature withdrawals.
If you withdraw your money within seven days of opening the account, the bank or company won't pay you any interest.

How the Penalty Charges are Levied on Premature Withdrawal?

It is essential to be aware of the penalty charges associated with the premature withdrawal of fixed deposits. This can help you plan your finances better and avoid any unnecessary expenses.

Most banks Penalise Premature FD Withdrawal as Described Below

Let's say you put ₹10 lakhs in a fixed deposit for three years at 7.5% per year. However, after a year, you need to withdraw your money. When you initially invested, the interest rate for a one-year term was 7% per year. You have already earned interest at 7.5% for the first year, but if you withdraw early, the bank will recalculate the interest rate based on 7% minus 1%, which is 6% per year. This means you will receive a lower interest payout. Remember that only the interest earned will be subject to a penalty, and your principal amount will remain the same.

Principal Amount₹10 lakhs
3 Years FD Interest Rate (at the time of booking)7.5% p.a.
3 Years FD Effective Annual Interest Rate7.71% p.a.
Maturity Amount after 1 year₹10,77,136
1-Year FD Interest Rate (at the time of booking)7% p.a.
Penalty for premature withdrawal of an FD1% on the rate throughout the duration of the FD's stay with the bank.
The final interest rate applicable6% p.a. (7% - 1%)
The final effective annual interest rate applicable6.14% p.a.
Premature withdrawal amount₹10,61,364

The above is the most generally used technique for calculating the penalty for bank fixed deposits.

Understanding The Process of Closing an FD Prematurely

You have two options for withdrawing your Fixed Deposit before the maturity date: offline or online.

To make an offline withdrawal, go to your bank branch and fill out a form for closing your FD account early. You must also complete the required  paperwork and hand over your Fixed Deposit Receipt.

If you prefer a digital option, keep in mind that certain banks only offer online withdrawals for deposits made online. To utilise the online option for premature withdrawal of fixed deposits, check that net banking is enabled.

How to Prematurely Withdraw Your Fixed Deposits Online?

  1. Login to your lender's official website.
  2. Navigate to the website's service request page.
  3. Then click on "Premature Closure of Fixed Deposits."
  4. Enter the necessary information, such as your FD number, and submit a request to cancel the fixed deposit.

How to Prematurely Withdraw Your Fixed Deposits Offline?

  1. Fill out the premature FD withdrawal form and return it to the branch. Check that all of the necessary information, such as the FD number, name, and bank account information, is correctly provided.
  2. Submit the premature FD withdrawal form together with documents such as an Aadhaar card and PAN card, among other things.
  3. Next, your request will be processed by the bank and your funds will be sent to your account when the FD is closed, either online or offline via a cheque.

Disadvantages of FD Premature Withdrawal

  • Penalties: Banks usually charge a fee for premature withdrawal. This fee typically ranges between 0.50% and 1.00% of the interest earned on the FD.
  • Loss of interest: Withdrawing your FD prematurely means you won't receive the interest amount. The sum you get will depend on factors like the interest rate, tenure of the FD and any applicable penalty fees.
  • Affect your future cash flow: If you've planned your cash flow around a series of FDs, premature withdrawal can disrupt your financial plan.

Alternatives of Premature Withdrawal of FD

FDs are usually created for longer tenures, but there might be situations where you require a lump sum amount of money and will be required to withdraw prematurely, thus attracting a penalty. Here are some ways to avoid this penalty:

  • FD laddering: This method involves opening multiple FDs with different maturity dates instead of putting all your money into one FD. Laddering your FDs this way will give you access to your money at different tenures, reducing your chances of paying a penalty.
    For example, let’s say you have a lump sum amount of ₹5 lakhs that you want to invest in FDs. You open five FDs of ₹1 lakh each, with maturity dates ranging from one year to five years. If you need to withdraw money prematurely, you can withdraw from the FD with the earliest maturity date. This way, you will only have to pay a penalty for a smaller amount.
  • Loan against FD: Instead of withdrawing from your existing FD with the bank, you can take a loan against it. This will allow you to access your money without paying a penalty.
  • Credit Cards: Credit cards are a popular way for individuals to meet their spending needs. Individuals with good credit scores and credit history can easily borrow money on their credit cards to cover unexpected expenses. This way, you don’t have to withdraw from their FDs and pay a penalty prematurely.

Conclusion

Fixed deposits are a popular investment option in India due to their low-risk profile and guaranteed returns. However, there may be situations where you need to withdraw the FD prematurely. Therefore, it is essential to understand the rules, procedures, and penalties associated with the same. Different banks have different criteria and penalty charges for premature withdrawal. Penalty charges can reduce the interest rate earned on the deposit and sometimes even nullify the interest entirely. This guide provides a comprehensive understanding of breaking an FD in India, covering rules, penalties, and procedures for breaking an FD. Hence, it is essential to understand the penalty charges and the calculation method used to avoid unnecessary expenses. Overall, this guide equips you with all the information you need to make an informed decision while you break an FD.

FAQs

What is the penalty for premature withdrawal of a fixed deposit?

Most banks have a fixed penalty for premature withdrawals, deducted from the total interest earnings. For instance, if your bank’s premature withdrawal penalty is 1%, the interest rate on your deposit will come down by 1%. In the case of post offices, the charges depend on the term of the FD.

Can I withdraw money from the fixed deposit before maturity?

Yes, withdrawing prematurely from FD is possible. But it does attract some charges. These fines are charged to encourage a savings habit.

How long does it take to withdraw money from a fixed deposit?

The process of prematurely withdrawing from FD can be online and offline. If your institution offers online facilities, it will take 48 hours for withdrawals to complete. Some financial institutions may want you to visit the branch or outlet physically. In this case, the closure process takes the same time.

What is an overdraft on FD?

FD overdraft is an alternative for premature withdrawal. In other words, it is a loan taken by pledging your FD as collateral. The good thing is that, in this case, the loan interest rates will be much lower than a personal loan, and you can repay anytime within the deposit’s tenure.

Can I withdraw my fixed deposit before maturity online?

Yes, you can withdraw your fixed deposit before maturity online.

Do all banks charge the same penalty for prematurely withdrawing a fixed deposit?

Most banks impose a penalty of 0.5% to 1% for premature withdrawal of a fixed deposit.

Can I partially withdraw FD before maturity?

Some banks provide a partial withdrawal facility on FD before maturity.

Is premature closure facility applicable for tax saver fixed deposit?

No, premature withdrawal is not allowed for a tax-saver fixed deposit.

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