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What is a premature withdrawal of FD?

Investing in a fixed deposit is done by many as it is considered to be one of the safest ways to gain returns while not risking the invested principal. Typically, an FD spans out between a few months to a few years. Premature withdrawal of FD would mean to withdraw the amount you invested before your term ends. Typically, investors opt for a premature closure of FD in terms of financial difficulties to serve their financial needs. 

How does premature withdrawal affect interest rates?

The FD interest rate will ultimately reduce if you go ahead with premature closure of FD. However, the depreciation on the interest rate depends on the scheme provided by the bank.

Here is an example of how the penalty is calculated by banks as a result of premature withdrawal of FD. Consider an individual to invest Rs. 1 Lakh for 2 years at an interest rate of 6%. The FD break charges for FD premature withdrawal at year 1 is 1%. So, the actual interest rate considered for the invested capital will be only 5%.

Penalty for premature closure of FD

In the penalty for premature closure of FD, you will experience FD break charges. That is, a penalty will be charged if you withdraw your fixed deposit before the term ends. The penalty for premature closure of FD varies across banks and financial institutions. A certain percentage of the amount will be considered a penalty. Prematurely closing a FD can cause substantial monetary loss and one should definitely look for a FD premature withdrawal penalty calculator before making any FD closure decision.

For example, if a bank offers a 7% interest rate for the first 2 years, they may have a 1% penalty for premature closure of FD. So, if you had invested Rs. 1,00,000, you will be charged ₹1,000 as a penalty if you withdraw your fixed deposit within the 1st year.

How to close FD prematurely?

Premature closure of FD can be done by following these 4 simple steps:

Step 1: Visit the branch of the bank and request a fd premature withdrawal form.

Step 2: Now, fill in all the details on the form which will include details like your name, bank details, FD number, and many others.

Step 3: Then submit the signed premature fd closure form to the bank which will help them process your request for premature closure of FD

Step 4: Once your FD is closed prematurely, the funds will be credited to your savings account.

Disadvantages of premature withdrawal

Here are a few reasons why a premature withdrawal of FD is not a good choice.

  • They come at a cost and charge you penalties

  • You miss out on your potential earnings if you withdraw your FD prematurely

  • The interest rate you can avail of will decrease

  • Premature withdrawal of FD robs you of the chance to grow your capital as FDs gain more value over time.

  • It can bring in financial uncertainty in the long run.

How to avoid FD premature withdrawal while ensuring liquidity?

You can use any of the following approaches to ensure liquidity as well as avoid premature withdrawal.

1. Avail loans

Bank FDs typically allow you to avail of a loan against deposits. Usually, the interest charged on this loan will be 1% to 2% higher than the interest paid to you through FD. However, the interest rate of this loan will be lesser than that of a personal loan as it has an underlying security deposit.

2. Use the laddering approach

In simple terms, laddering translates to diversifying your portfolio. So, invest in different bank FDs with different maturity periods and term ends to decrease risk. Before investing, one should definitely take a look at FD calculator to help them choose better options.

3. Leverage sweep-in accounts

Sweep-in FDs provide you with an interest rate for your FD and the liquidity equal to that of a savings account. Besides, there is no penalty charged on a sweep-in account on premature withdrawals. 

FAQs

  • ✔️Can all fixed deposits be closed prematurely?

    No, not all FDs can be closed prematurely. With certain deposits, where the deposit amount is higher, premature withdrawal before the maturity period is not allowed.

  • ✔️How can I permanently close an FD?

    You can close an FD offline or online. You could either visit your bank branch or visit your net banking site to permanently close your FD. FD break charges may vary, depending upon the financial institution. 

  • ✔️Can I reinvest after a premature withdrawal and continue on my profits?

    Once you go ahead and complete premature withdrawal of FD, you will have to begin from scratch and will not be able to continue with your previous financial gains. 

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