The most common type of investment for investors is a fixed deposit. By making fixed deposit investments, they work to balance their investment portfolio. Without any danger of market swings, you can get assured returns at a set interest rate upon maturity. In an FD account, the money that is put is locked and cannot be withdrawn at any time. Therefore, the investor has the option of early withdrawal or breaking the fixed deposit if the money is needed immediately.
What Is Premature Withdrawal Of Fixed Deposit?
A premature withdrawal of a fixed deposit is the withdrawal of funds from a fixed deposit account prior to the maturity date. Depending on your financial needs, you can choose between a partial and a total withdrawal. Typically, investors choose premature withdrawal if they have an immediate need for funds. Additionally, investors may withdraw funds from a fixed deposit before to maturity if a superior investment alternative exists.
The penalty represents the additional fees assessed by the bank for the early withdrawal of fixed deposits. Typically, penalties are assessed on the interest rate on fixed deposits. In other words, the real interest received at the time of premature closure will be reduced. Therefore, the major purpose of fixed deposits is to prevent frequent withdrawals and promote savings.
Premature Fixed Deposit Withdrawal Penalty
Most banks impose charges for early withdrawal of fixed deposits. Typically, this is between 0.5% and 1.0% of the interest rate.
In the event of an emergency or if you prefer to invest the same amount in another investment option offered by the bank, some banks do not levy a penalty.
In addition, when an investor prematurely closes an account, the rate of interest is reduced relative to the initial fixed rate. Suppose, for instance, that an investor has invested a specific amount in a three-year, 8% annual yielding FD. For the first year, the annual rate of interest generated was 6%. If the investment is withdrawn early after one year, the investor will receive 6% annually rather than 8%.
Therefore, early withdrawal of a fixed deposit results in a substantial loss for the investor, unless it is absolutely unavoidable.
For certain banks, deposits cannot be withdrawn until at least six months have passed since the date the account was started, and no interest is given on early withdrawals.
How To Avoid the Penalty On Premature FD Withdrawal
Fixed Deposit (FD) is one of the most popular financial instruments. You can invest up to ten years in a fixed deposit scheme and receive excellent income, which would help you meet your long-term financial needs.
However, there may be instances in which you are forced to remove funds from your fixed deposit account early, which would incur a penalty. In order to prevent this, there are a number of strategies to avoid the penalty for early withdrawal of FD. We will have a look at the methods given below.
- FD Laddering
FD laddering is the practice of applying for multiple fixed deposit schemes with varying maturities. By creating numerous fixed deposit accounts, it is possible to divide a lump sum amount into smaller amounts.
For instance, if you had a lump sum of Rs. 7 lakh, you might invest it in seven separate smaller FDs with maturities ranging from one to five years. In this manner, you will have both long-term fixed deposit accounts and short-term accounts to provide sufficient liquidity.
As a result of the laddering process, you may not be obliged to make any premature withdrawals while still meeting your immediate financial needs. However, if you need to remove funds prematurely, you will only withdraw the amount necessary.
Instead of prematurely withdrawing from your fixed deposit account, you can take out a loan against the value of your fixed deposit. The majority of lenders provide this option and charge interest rates between 1% and 2% above the deposit rate. The interest rate charged will vary from bank to bank, and it is suggested that you visit your bank with any questions before utilising this service. The majority of lenders permit borrowers to withdraw up to 90 per cent of their initial investment.
- Sweep-in Facility
This feature permits the lender to transfer from your savings account to a sweep-in account any cash in excess of the amount you specified. When creating a sweep-in account, the term can range from one to five years, and you are likely to receive a greater rate of interest on the funds deposited.
To be eligible for this service, however, you may be needed to register an FD account with a minimum of Rs.25,000 in your savings account. This option provides a larger corpus and meets your immediate financial needs without requiring you to touch your regular assets. There is no penalty for making withdrawals at your leisure.
Premature Withdrawal Fixed Deposit Penalties For Top Banks
| Banks | FD Closure Charges |
| Axis FD | 1% |
| SBI FD | 0.50% |
| STFC Fixed Deposit | 2% – 3% |
| Bajaj Finance FD | 0.55% – 1% |
| ICICI FD | 0.50% |
| HDFC FD | 1% |
How Does Premature FD Withdrawal From FD Affect Interest Calculation?
The rate of interest set at the account’s opening will not apply if an FD is withdrawn before the maturity date. Depending on the banking institution, the penalty fees range from 0.5% to 1%.
You can determine the interest upon the early withdrawal of an FD in one of two methods. Let’s use examples to better understand.
Case 1: Let’s say someone invests Rs. 1 lakh for a period of two years at a 7% interest rate. Assume that the interest rate is 6.5 per cent for a year. If the deposit is prematurely closed after the first year of the FD, the bank or NBFC will recalculate the interest at the new FD rates. 6.5% – 1% = 5.5% would be the ultimate FD rate. Instead of the initial 7% interest rate, the premature withdrawal amount will be computed using the new interest rate.
Case 2: Assume a person invests Rs. 1 lakh in an FD with a 2-year term and a 6% interest rate. The penalty for an early withdrawal is equal to 1% of the effective interest rate, assuming the interest rate for a year is 7% at the time of booking. For a full year, interest is earned at 6%. If you remove the FD after a year has passed, the bank or NBFC will continue to compute interest at the lowered interest rate, which is 6% – 1% = 5%. Instead of 6%, your early withdrawal amount will be computed at 5%.
Note that this illustration is just meant to serve as a guide. The exact computation differs for each bank/NBFC and may be different at the time of withdrawal.
How To Break FD Prematurely?
You can choose to withdraw fixed deposits early with a minimal penalty. Also, the premature withdrawal of Fixed Deposit can be completed online or offline. The funds are deposited promptly to your savings account. These are the steps involved in the withdrawal procedure:
- Online FD Withdrawal
The following are procedures for prematurely withdrawing from a fixed deposit:
- You must first go to the website of your particular bank.
- Use your login information to access your online banking.
- Select the “Fixed Deposit” option under your account after logging in.
- Choose the fixed deposit account that you want to withdraw money from.
- Select Premature Withdrawal by clicking.
- The details of your early withdrawal will show up on the screen; choose the account you want to transfer to.
- In order to finish your withdrawal procedure, click “Submit.”
For all banks, the withdrawal procedure is essentially the same. The next steps, however, might differ depending on the bank.
- Offline Withdrawal of FD
The processes for early fixed deposit withdrawal offline are as follows:
- To begin with, you must physically go to the bank location where you created the FD account.
- Along with the appropriate withdrawal form, deposit certificate, ID proof, and photo, you must also submit these documents.
- You will receive the money in your savings bank account when all of the paperwork has been satisfactorily verified.
The Disadvantages of Premature Withdrawal of Fixed Deposit
When someone prematurely withdraws FD, they stand to lose on several fronts. These are described below:
- Penalties:
The investor is required to pay a set sum to the bank as a penalty in the event of an early withdrawal. The bank typically assesses a penalty of between 0.50% and 1.00% of the interest. The penalty can alter over time if the bank decides to amend its guidelines.
- Loss of Interest:
When a person takes a withdrawal before maturity, they should be aware that they will not get the exact amount determined by the fixed deposit’s interest rate and term since the withdrawal was made before the tenure that was specified on the date the FD was booked. When determining the amount you will get following an early withdrawal, be careful to add the applicable penalties.
- Stop the Financial Growth:
Fixed Deposits are intended to offer the depositor guaranteed interest returns at the maturity date. If you have scheduled your cash flow with a succession of FDs, the early withdrawal of the scheme may disrupt your cash flow and may have a negative impact on your budget.
- Process for Premature Withdrawal is Exhausting:
In addition to everything else, it is a reality that an early withdrawal of the deposit is a complicated procedure and not a simple transaction. Multiple steps are required to finish the procedure. Formalities of the procedure include filling out forms, meeting with bank authorities, presenting documentation, etc.
FAQs
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Why Would One Choose For A Premature Withdrawal?
Some of the causes for premature withdrawal are as follows:
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- Personal reasons include family emergencies, assisting a friend in need, and so forth.
- Finding an investment that is riskier but also pays better in the long run.
- The investor has little faith in the bank or NBFC to whom he has given the funds.
- Other reasons
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How Can I Get A Withdrawal Application For A Fixed Deposit?
You will be asked to submit the fixed deposit receipt that you got when the funds were put into your FD account. Furthermore, the receipt must be signed by all account holders. This procedure assures that there is no misappropriation of funds.
Customers may find themselves losing the bank-issued FD receipt. In such a scenario, what should you do? A form for liquidating a fixed deposit account must be filled out by the account holder. The bank will handle your premature withdrawal of fixed deposit after you have completed and filed this form, and the funds will be placed into your savings account.
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Do I Need To Pay Any Fines Or Penalties?
Unfortunately, if you prematurely withdraw the funds, you will be required to pay the penalty costs. The penalty is typically imposed by the majority of banks. In most cases, the penalty fees range from 0.5% to 1% of the interest rate that is imposed on your FD amount.
However, if you have an emergency, some banks do decide to waive the penalty fees. Alternatively, if you want to move the FD amount to another bank scheme, they might not impose any penalties.
Withdrawing funds from the FD early results in a loss for the investor in addition to the penalty. When returning the money, the banks typically lower the interest rates assessed on the FD amount.
Therefore, it is not advisable to take your FD money from the bank unless it is absolutely essential.
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Is The Premature Withdrawal Option Available For Tax Saver Fixed Deposits?
No, early withdrawal from a tax saver FD is not permitted.
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