Premature Withdrawal of FD

Premature withdrawal of a Fixed Deposit (FD) means withdrawing the deposited amount before the maturity date. Typically, FDs come with a fixed amount for a specific tenure, during which the principal amount earns interest at a predetermined rate. 

 

However, situations may arise where the funds are required sooner, this leads to fixed deposit withdrawal before maturity. 

 

A premature withdrawal impacts the interest earnings of the FD. Financial institutions generally levy a penalty or reduce the applicable interest rate on the deposit amount as a consequence of breaking the original tenure commitment. The revised interest rate is usually lower than the agreed rate for the full tenure, which directly affects the overall return on the 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, or the pre-closure charges for an FD 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:

Disclaimer: The above-mentioned premature withdrawal penalties are subject to change as per changes in the issuer's policies.

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

Note: The above premature withdrawal penalties are subject to change as per changes in the issuer's policies. The penalty will be charged on the applicable interest rate for that period. 

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• A Percentage of the Funds Withdrawn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 as the premature FD closure charges. 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.

Note: The above figures are estimates, and the actuals may vary depending on the issuer’s terms.

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 may require to pay the fixed deposit breaking charges as applicable.

 

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

 

Here is the process to break an FD account prematurely through offline mode:

 

1. Go to the branch where you opened your FD account

2. Request for an FD close application form from the bank staff

3. Fill out the form with necessary details

4. Indicate whether you want to withdraw the entire amount or a partial amount

5. Submit the required documents, such as the FD receipt, ID proof, etc.

6. Hand over the form and documents along with paying the FD breaking charges to the bank official for processing

7. Ensure that you keep a copy of the submitted form for your records

 

After processing, the funds will be transferred to your linked savings account.

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 Fixed 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 Fixed 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.

 

Advantages of Fixed Deposit Premature Withdrawal

• Withdrawing your FD early provides immediate cash, helpful in emergencies like medical needs

• Breaking your FD allows you to modify your investment, such as using an FD laddering strategy or finding higher interest options

• Using FD funds to pay off high-interest debt can reduce financial strain and save on interest costs

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

Premature withdrawal of a fixed deposit (FD) allows you to get funds before maturity, providing flexibility in emergencies or when financial adjustments are necessary. 

 

However, it’s important to consider that withdrawing your FD early may lead to penalties or reduced interest, impacting the returns you would have earned if the FD reached full term. 

 

Analysing your immediate financial needs against the potential loss in earnings can help you make an informed decision about whether early withdrawal aligns with your financial goals.