Can you withdraw your Fixed Deposit prematurely?
Meaning, Penalty calculation, Cases, Ways to avoid withdrawal & Bottomline
Are you looking for funds to buy that machinery to scale your business or start your dream venture, but you are facing a cash crunch? Have you exhausted all conventional sources of funding? And even dived into the circle of family and friends?
Premature Withdrawal of Fixed Deposit- The Nitty Gritty
Generally, the penalty charges range from 0.5 % to 1 % of the interest rate, varying from bank to bank. The penalty is the amount charged by the bank when the depositor takes out the money from the bank before the date of maturity. The fine is levied on the interest to be paid to the depositor. Very few banks offer zero penalty charges on premature withdrawal. However, the bank is not liable to pay the interest if the FD is prematurely closed before completing seven days from the booking date.
You can apply for premature withdrawal in two ways, offline and online.
For the traditional method, you need to visit the bank, submit the required documents, fill out the application form, visit the home branch and get the FD closed.
For the online method, you must have booked the FD in online mode in the first place, and internet banking should be enabled for it. Your account should have a net banking facility.
If you need a lesser amount of funds than your fixed deposit, you can also save on the penalty by going for a partial withdrawal. However, a partial withdrawal is not allowed if the fixed deposit account is a Tax saver/ Non-Withdrawable Fixed Deposit. Most banks have a lock-in period of five years for Tax Saver Fixed Deposit.
Did you know that you need to maintain AMB (Average Monthly Balance) on the bank account linked to your Fixed Deposit?
You can also read related article - How To Get a Personal Loan With a Low Credit Score?
FD Premature Withdrawal Penalty Calculator
There are two cases that may arise in the case of a premature withdrawal of a fixed deposit. The difference between these two cases is the annual rate of interest provided by the two bank accounts; the Fixed Deposit account and the Savings Account. The scenario changes based on which account has the higher interest rate.
Case 1
Assuming that a customer has created an FD worth ₹1 lakh that provides 7% interest for 2 years. For the same scenario, let's assume that the prevalent savings account interest rate is 6.5%. She withdraws from the FD after completing 1 year. In one year, she would have earned around ₹7,000 in interest at the FD's rate of 7%. However, the new interest rate for the sake of premature withdrawal would be 6.5% – 1%= 5.5%. Therefore, the new rate will be 5.5%, and interest shall be paid at this rate instead of the previous 7%.
Principal Amount - Rs. 1 lakh
Booked Interest Rate on a Two-year FD - 7 per cent per annum
Maturity Amount after One Year - Rs. 1,07,186
Interest Rate on One-year FD (at the time of booking an FD) - 6.5 per cent p. a.
Effective Rate of Interest - 6.5 per cent per annum
Premature Withdrawal Penalty Charges - 1 per cent
Final Rate of Interest Payable - 5.5 per cent per annum
Amount Receivable on Premature Withdrawal - Rs. 1,05,614
Case 2
Assuming that another customer has invested in an FD of Rs. 1 lakh at a rate of 6% for 2 years. Let us also believe that the interest rate for a normal savings bank account for 1 year at the time of the creation of the FD is 7%. The penalty rate for premature withdrawal shall be 1% of the effective interest rate in this case. The effective interest rate, in this situation, will be the lower of the two rates, and the lower rate shall be used for the calculation of the revised interest rate on the FD.
He withdraws from the FD after completing 1 year. For this period, he has accrued interest @ 6%. But the effective FD rate in the case of this premature withdrawal will be 6% – 1%= 5%. The holder of the FD account shall receive a reduced amount of interest after the reduction of the penalty.
Principal Amount - Rs.1 lakh
Booked Interest Rate on a Two-year FD - 6 per cent p. a.
Maturity Amount after One Year - Rs. 1,06,136
Interest Rate on One-year FD (at the time of booking an FD) - 7 per cent p. a.
Effective Rate of Interest - 6 per cent p. a.
Premature Withdrawal Penalty Charges - 1 per cent
Final Rate of Interest Payable - 5 per cent p. a.
Amount Receivable on Premature Withdrawal - Rs. 1,05,095
FD Withdrawal -Some Points To Ponder
FDs are considered a haven to park your money if you are a risk-averse investor. Breaking your FD prematurely may lead to some adverse consequences; you need to give thought to:
Penalty
Reduced interest,
Reduction in the matured amount of FD.
For retirees, premature withdrawal can stress one's retirement funds. Individuals can consider taking a loan on the FD.
The documentation and filing processes are often cumbersome.
Ways To Avoid Making a Premature Withdrawal
1. Bank FD laddering: Laddering is buying multiple FDs maturing at different periods. Divide your lump sum investment into smaller investments that will mature at different times, say, one year, two years, five years and so on.
2. Sweep-in facility: The facility enables you to transfer any sum over a preset amount specified by you from your savings account to a sweep-in deposit account. The interest rate varies according to the tenure of the deposit, from one year to five years. However, the preset amount mentioned above needs to be at least ₹25,000.
3. Avail a loan against the FD: In many cases, most banks provide a loan against the FD. The amount that can be received as a loan can go as much as 90 % of the deposit account. The interest rate is usually 1-2% above the interest paid on the deposit.
You can also read related article - How To Get a Personal Loan With a Low Credit Score?
The Bottom Line
Fixed deposits and their greater security as a result of low risk are often used by risk-averse investors. These include individuals with inflexible horizons, and a premature withdrawal can jeopardies their financial standing. Thus, proper research is necessary before taking a decision with such serious consequences. That being said, go for a premature withdrawal of your FD if it helps fulfil your requirements. When you need funds, breaking your FD can be a better option than other lending instruments based on your financial appetite.