Premature Withdrawal of FD

Most banks and Non-banking Financial Companies (NBFCs) give you the option to prematurely withdraw funds from your FD. This act of breaking the FD may be committed to quickly access funds for an emergency or other financial needs. While depending on the FD type, issuers may permit early withdrawal, it may be subject to an FD premature withdrawal penalty. 

This penalty will vary across issuers, typically ranging from 1% to 3%, and is applied on the interest rate. The interest earned is recalculated based on the actual period the FD was held, often at a lower rate. This results in lower overall returns than initially expected, making premature withdrawal less favourable unless necessary. 

According to their policies, the premature FD withdrawal charges vary with different banks. Refer to the following table to know the charges for some banks:

Here is the fixed deposit early withdrawal penalty that various NBFCs levy:

The penalty that issuers apply if you choose to make premature withdrawals depends on their policies. Here are the ways in which they levy the penalty:

• A Percentage of the Funds Withdrawn

Most issuers charge a percentage of the total funds you opt for FD preclosure. For instance, say you withdraw ₹10,000 from an FD of ₹1 Lakh, and the issuer applies a penalty of 2%. In this case, a 2% penalty will apply on ₹10,000, amounting to ₹200.

• Subtraction from the FD Interest Rates

Some issuers do not levy a monetary penalty. Instead, they reduce the interest rate that is applicable to your FD. For example, say the current interest rate on your FD is 7% p.a.

In case you decide to withdraw from your deposit, the issuer may reduce the rate, say by 1%. In this case, the rate applicable to your FD will be reduced to 6% p.a.

Calculating the penalty in advance is a smart decision if you are planning to make premature withdrawals on your FD. This helps you understand how the withdrawal impacts the maturity amount.

You can use an FD premature withdrawal penalty calculator to evaluate the penalty you need to pay in your case. You need to enter the following details in the tool to get accurate calculations instantly:

• Principal amount

• Applicable interest rate

• Deposit term

• Premature FD closure term

To help you understand the calculation, refer to the following table. Suppose you invest ₹1,00,000 in an FD for 3 years at 5.80% p.a. If you withdraw the FD after one year, the interest rate for that year is 5.50% p.a. With a 1% penalty for early withdrawal, your new interest rate will be 4.50% p.a., which is lower than the original rate.

The process for premature withdrawal of FD may be different for each issuer. Here are the general steps you need to follow:

1. Visit the official website of the FD issuer

2. Log in to your net banking account using your credentials

3. Navigate and go to the fixed deposit option

4. Select the premature withdrawal option in your FD account section 

5. Choose the bank account to which you wish to transfer the amount 

6. Click on the submit option to complete the process

You can also carry out this process offline by visiting the nearest branch of the issuer.

You could manage your financial needs without incurring premature withdrawal penalties by considering these approaches:

• Loan Against FD

Most issuers allow you to take a loan against your deposit, providing a convenient way to get funds. While it depends on the issuer’s policies, the interest for a loan is typically 1% to 2% above the interest applicable on the FD. This way, you can get funds against your fixed deposit without a premature withdrawal penalty.

• FD Laddering

This technique involves dividing a lump sum into multiple FDs with varying maturity periods. By doing so, you ensure that one FD matures periodically, providing you with regular access to funds without needing to break any FD prematurely. This strategy balances liquidity with the benefit of earning higher interest on long-term deposits.

• Sweep-in Facility

Banks offer a sweep-in facility linked to your savings account. When your account balance exceeds a specified amount, the surplus funds are automatically transferred to a sweep-in deposit. This allows you to earn higher interest on the excess funds while maintaining easy access to your money when needed.

While premature withdrawal of fixed deposits could help you address unforeseen financial needs, it also comes with some limitations. Here are the main disadvantages you need to be aware of:

• Penalty

Withdrawing an FD before maturity often comes with a penalty, which reduces your returns. The interest is also recalculated at a lower rate for the time the FD was held, making it less beneficial than keeping it until maturity.

• Lower Interest Earnings 

When you withdraw an FD prematurely, you lose out on the interest amount that you could have earned. This is because the total deposit amount is reduced, and you earn interest only on the remaining amount.

An alternative to access funds without withdrawing your fixed deposit prematurely is getting a secured credit card. Here is how they work:

• A secured card helps you enjoy quick access to funds by pledging your deposit as collateral

• The issuer grants you a credit limit based on the total amount that you deposit

• You can use these cards for various types of payments and transactions online as well as offline and repay the dues later

• You get the credit card statement at the end of the billing cycle, usually at the end of the month

• In case you fail to repay the dues within the due date, the issuer will apply interest on the outstanding balance as well as levy late payment charges

• Opting for such cards is ideal if you have a low credit score or no credit history

The information provided by BFDL is related to the rates provided by Banks and Deposit taking NBFCs as available from public domain and under no circumstances is intended to be source of advice or recommendation of any financial investment advice or endorsement of any sort. BFDL disclaims any responsibility or liability regarding inaccuracies, omissions, mistakes etc. as well as offers and use of such information set out is entirely at the User’s own risk and User should exercise due care prior taking of any decision, on the basis of information mentioned hereinabove. Display of any intellectual property along with the related product information does not imply BFDL’s partnership with the owner of the intellectual property of such products and is solely for the purpose of information, unless otherwise provided by BFDL.