Updated on: Sep 15th, 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.
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.
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.
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.
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 Rate||7.71% 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 FD||1% on the rate throughout the duration of the FD's stay with the bank.|
|The final interest rate applicable||6% p.a. (7% - 1%)|
|The final effective annual interest rate applicable||6.14% p.a.|
|Premature withdrawal amount||₹10,61,364|
The above is the most generally used technique for calculating the penalty for bank fixed deposits.
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.
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.
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.