Premature Withdrawal of Fixed Deposit: Everything You Should Know

What are the Penalty Charges for FD Premature Withdrawal?

The premature FD withdrawal penalty depends from bank to bank, but usually, the interest rate is between 0.5% and 1%. But if you want to close your FD prematurely and want to open another account in the bank or you are withdrawing for an emergency, you withdraw money from the FD without penalties.

Apart from this scenario, the interest rate on your savings will be lower if you close the account prematurely. For instance, if you have a fixed deposit with the decided interest rate of 8% at the end of the tenure of three years. And the interest rate you earned for the first year was 6%, but if you close your account before three years, you’ll receive only a 6% interest rate on your earning.

• Premature FD Closer Penalty Charges of Different Banks

  Depending on the bank, there are different penalty charges for premature FD closure. Here is a list of different banks and their penalty rate:

  Bank Name	Penalty rate
  Freo	1% (No Penalty on premature withdrawal above 6 months)
  Bank of Baroda	1% (not applicable for amount less than ₹5 Lakh and if kept for a minimum of one year)
  Axis Bank	1%
  Bank of India	1%
  HDFC Bank	1%
  Canara Bank	1% (applicable for deposits less than ₹1 Crore)
  ICICI Bank	Up to 1.50%
  Punjab National Bank	1%
  IDBI Bank	1%
  Union Bank	None
  State Bank of India	1%

   

• Calculating Premature FD Withdrawal Penalty

  The penalty for premature closure is levied on the interest rate of the FD. But the calculations may vary depending on the bank.

  However, there can be two cases through which the bank will charge penalty on early FD closure:

  Case 1

  Let’s assume the penalty for premature FD closure is 1%. So, suppose you have invested ₹5 Lakh with a rate of 7% for two years, and for one year, the rate is 6.5%. If you want to withdraw the FD at one-year completion, your interest rate will be 7%, but the bank will calculate the interest rate on the revised FD interest rate, which is 6.5% – 1% = 5.5%.
   
  So, 5.5% is the interest rate you will be paid for the premature FD withdrawal instead of the decided 7%.

  Case 2

  If you invested ₹1 Lakh for three years at the interest rate of 6% and the interest rate for one year at the booking time was 7% with a penalty of 1%, and you withdraw after one-year completion, you will earn a 6% interest rate. But the bank will calculate the effective FD rate of 6% – 1% = 5%.
   
  Hence, a 5% interest rate will be your interest rate earned at the premature FD withdrawal instead of 6%.

Related Post: How To Calculate FD Interest?

What are the Drawbacks of Premature FD Closure?

There’s a reason why you open a fixed deposit account. It may be because you want to gain financial discipline or save for a purpose. Moreover, these accounts are not volatile and give you a fix return, so they are bound to come with some disadvantages after an early withdrawal, like:

1. Penalty Payment

   The first biggest disadvantage of premature FD closure is the penalty payment on your interest rate. If you are withdrawing the fixed deposit account money without an emergency or without opening any other account with the bank, then you have to pay charges ranging between 0.5% to 1%. The charges according to bank guidelines.

2. Unable to Receive Full Interest Rate

   You won’t be able to receive the full decided interest rate on your earnings.

3. Lengthy Process

   Some banks will allow you to close the FD prematurely online even if you have opened it online, but for the rest of the banks, you need to visit the bank’s physical branch for premature FD closure. This can be tiresome and time-consuming.

4. Asset Liquidation

   Once you liquidate an asset to meet your personal expense, you reduce your net worth, affecting your income budget projections and cash flow.

How to Avoid Penalty on Premature Withdrawal of Fixed Deposit?

There are three ways to avoid the penalty charges on the premature closure of your fixed deposit.

1. Bank FD Laddering

   This technique is where you get different FD accounts that mature at different periods to manage their liquidity. Try to break a huge amount into smaller amounts and invest these smaller chunks in different FDs.

   For example, instead of investing all of the ₹5 Lakh in one fixed deposit account, you can break it into five smaller amounts and invest it in different FD accounts with different maturity periods. This way, you have loads of liquidity, and if you need money, you can break one of the FDs before maturity while still having an amount left in other accounts for added benefits.

   Further, with the bank FD laddering method, you don’t necessarily have to divide the deposit amount into equal halves. You can choose to distribute it however you want and choose different banks based on their interest rate.

2. Sweep-in Facility

   With the sweep-in facility technique, you can avoid premature FD closure charges by transferring an amount from your FD account to the sweep-in deposit. Depending on the bank, the name of this facility changes. For instance, the State Bank of India calls this feature Savings Plus Account, while ICICI calls it Flexi Deposit, but all of these mean sweep-in facility.

   Further, based on the bank, the tenure will vary from one year to five years, along with the different interest rates. To be eligible for this facility, you need to open an FD of at least ₹25,000 with the bank. The amount transferred into this facility receives a higher interest rate and forms a separate corpus for withdrawal during emergencies.

   Additionally, the sweep-in facility charges no penalties for withdrawal. So, your earnings continue to earn the same interest rate.

3. Loan Against Fixed Deposit

   Every bank has the facility to allow you to take a loan against your fixed deposit account. The interest on this loan varies from bank to bank but is usually 1% to 2% higher than the interest paid on your FD.