The Ultimate Guide to Premature Withdrawal of Fixed Deposit

When you make a fixed deposit, you basically sign a contract with your bank to keep a certain amount of money with them for a specified period. The bank, in turn, promises to pay interest on that money for that period.  However, there is always an option to terminate this contract at any point in time if you need money. 

Terminating the contract before the promised period is called the premature withdrawal of the FD. To withdraw it prematurely, you need to submit a signed application. Nowadays some banks also offer the facility of premature withdrawal online. However, this premature withdrawal of FDs attracts a penalty.

Penalty Clause of Premature Withdrawal of Fixed Deposit

You get the flexibility of liquidating your fixed deposit anytime you need money by closing it before its term ends. The banks, however, charge some penalty on it, which is generally in the range of 0.5% – 1% of the interest amount.  Apart from paying this penalty on closing the FD prematurely, the fixed deposit interest rates you get are lower than what was given initially. This happens because you get the interest rate that is applicable for the amount of time the FD was active. 

Rate of Interest on Premature Withdrawal of Fixed Deposit

When you close the FD before the completion of the original term, the interest you get is for the period it remained with the bank. The rate of interest you get is what applied to it for that period on the deposit date. Further, the applicable penalty is also levied.

Let’s say you made an FD for three years @ 7%. You then had to withdraw it prematurely after a year. The one-year fixed deposit interest rate at the time of opening of your FD was say 5.5%. So, you will earn returns at a rate of 5.5% per annum and not the original rate of 7%. On this revised interest rate, you will also need to pay a penalty of 1%. So, the effective rate of interest for you on premature withdrawal comes out to be 4.5%. 

Which FD Cannot Be Withdrawn Prematurely?

Banks offer tax saver FDs, which have a lock-in period of 5 years. These FDs cannot be withdrawn prematurely in any case.

Some banks also have the condition that FD cannot be withdrawn prematurely before completing a minimum period of 6 months. In case you withdraw, no interest is paid to such a depositor. Thus, unless it’s absolutely necessary, don’t opt for premature withdrawal of an FD.

If you are breaking an FD because the banks have increased their interest rates and reinvesting it at a higher rate, then it makes sense. However, you need to do your math to check whether it is a winning situation for you or not.

FDs are an excellent investment tool that keeps your principal safe in addition to providing decent returns and high liquidity. You can use this risk-free and guaranteed fixed return tool to generate regular income at a decent rate of interest.