How to Avoid Penalty on Premature Withdrawal of Fixed Deposit?

5 mins read
by Angel One
Learn about premature fixed deposit withdrawal, its disadvantages and how to avoid penalties for withdrawing your FD before tenure.

Fixed Deposits (FDs) are a popular investment choice for stability and guaranteed returns, crucial for preserving capital and earning interest securely. While premature withdrawal is an option, it may result in penalties. In this article, learn about premature fixed deposit withdrawal, its penalties, disadvantages, how to avoid penalties and more. 

What Is Premature Withdrawal of Fixed Deposit?

Premature withdrawal of a fixed deposit refers to withdrawing the invested amount before the completion of the agreed-upon tenure. While FDs are designed for a specific maturity period, unforeseen circumstances or urgent financial needs may lead individuals to opt for premature withdrawal. 

For instance, if you have opted for a 5-year FD but decide to withdraw the funds after only 3 years due to a sudden financial requirement. 

Penalty for Premature Withdrawal of FD

You might have a question: what happens if we break FD before maturity? 

On withdrawing your FD before the tenure, there might be a premature withdrawal charge levied by the banks and financial institutions. This charge can vary from 0.5% – 1% of the deposit amount. 

Besides the premature withdrawal penalty, banks and financial institutions can also lower the interest rate on your deposit. For example, if you have deposited a certain amount on an FD, which earns an interest of 10% per annum, and the tenure of the deposit is 3 years. If you withdraw your deposit after one year, the interest paid will be less than 10%, depending on the bank’s terms and conditions. 

Unless you are in a financial emergency, premature withdrawal of FD may not be a good option.

Premature Withdrawal Charges on FD at Top Banks

Here’s a list of a few banks in India and their premature withdrawal charges on fixed deposits.

Bank Premature withdrawal penalty
State Bank of India 0.50% – 1%
ICICI Bank 0.50% – 1%
Axis Bank 1%
HDFC Bank 1%
Kotak Mahindra Bank 0.50%
IDFC First Bank 1%

Note: The data provided here is subject to change. Contact the bank for updated charges. 

Disadvantages of FD Premature Withdrawal

  • Penalty Charges: Premature withdrawal from Fixed Deposits often incurs penalty charges, reducing the overall returns on the investment.
  • Interest Rate Reduction: Banks may lower the interest rate applicable to the FD in case of premature withdrawal, resulting in diminished earnings. On withdrawing before the maturity date, you might lose out on the potential interest income that would have accrued over the entire tenure.
  • Impact on Financial Goals: Premature withdrawal can disrupt long-term financial planning and hinder achieving specific financial goals you might have set at the time of deposit.

How To Avoid the Penalty on FD Premature Withdrawal?

While FDs typically have a tenure of up to 10 years, unforeseen circumstances may necessitate premature withdrawal, incurring penalties. However, you can think of strategic approaches that help you avoid penalties and optimise the flexibility of FDs. Here are a few ways to make use of your FDs instead of withdrawing them before tenure and losing out on potential returns. 

FD Laddering 

Implementing FD laddering involves distributing your fixed deposits across different maturities. By staggering the tenures, you create a systematic approach to accessing funds without incurring penalties. This strategy offers liquidity as a portion of your FDs matures regularly, providing the flexibility to reinvest or use the funds as needed. Laddering minimises the impact of premature withdrawal penalties and ensures a steady cash flow.

Suppose you have a total amount of ₹5,00,000 to invest, and you decide to use FD laddering by dividing it into five equal parts of ₹1,00,000 each. You then invest each ₹1,00,000 in separate FDs with different tenures, such as 1 year, 2 years, 3 years, 4 years, and 5 years.

  • Year 1: Invest ₹1,00,000 in a 1-year FD at a specific interest rate.
  • Year 2: Simultaneously, invest another ₹1,00,000 in a 2-year FD with potentially a different interest rate.
  • Year 3: Repeat the process by investing ₹1,00,000 in a 3-year FD.
  • Year 4: Invest ₹1,00,000 in a 4-year FD.
  • Year 5: Finally, allocate the remaining ₹1,00,000 in a 5-year FD.

As each FD matures, you can reinvest the amount in a new 5-year FD or use the funds as needed. This approach provides regular access to liquidity while optimising returns, as a portion of your investment becomes available at different intervals without the need for premature withdrawals.

Loan Against FD

Opting for a loan against your FD allows you to access funds without breaking the deposit. Financial institutions and banks provide loans against the FD as collateral, offering a quick and convenient solution. This approach helps avoid penalties associated with premature withdrawal, as the FD remains intact, earning interest. This way, you can meet urgent financial needs while preserving the FD investment.

Sweep-in Facility

The sweep-in facility is a feature offered by some banks that automatically transfer surplus funds from your FD to linked savings or current account to cover shortfalls. This way, you can utilise the funds seamlessly without breaking the FD and incurring penalties. The sweep-in facility ensures liquidity by making funds readily available in your primary account as needed. It offers the convenience of accessing funds without manual intervention, providing a balance between earning interest on the FD and meeting immediate financial requirements.

How To Break an FD Account Before Maturity?

You can withdraw your FD before the tenure through both online and offline channels. For offline withdrawal, you can visit the nearest branch of your bank and initiate the withdrawal process. A few banks offer an online withdrawal facility, which can be done on the bank’s Internet Banking portal. You can check the way that suits you and proceed with the withdrawal process. 

Conclusion 

In conclusion, different financial institutions have different rules regarding premature withdrawal. Hence, it is crucial to understand and consider these policies before making any early withdrawals. For a seamless investment journey beyond fixed deposits, consider opening a free Demat Account with Angel One. 

FAQs

Is the penalty charge for premature withdrawal of FD the same at every bank?

No, penalty charges for premature FD withdrawal vary among banks. Different financial institutions have distinct policies, and penalties are determined by the terms and conditions specified by each bank.

What is the meaning of a liquidated fixed deposit?

Liquidating a fixed deposit means converting your deposit into cash on or before its maturity date.

Can I break my FD before maturity?

Yes, FDs can be broken before maturity. However, it often incurs penalty charges, reducing the overall returns on the investment.

Will premature withdrawal of FD impact the credit score?

Premature withdrawal of FD does not impact credit scores. Credit scores are influenced by credit-related activities, not fixed deposit transactions.

What is the minimum tenure on a fixed deposit?

The minimum tenure for a fixed deposit varies among banks, typically ranging from 7 days to 1 year, depending on the bank’s policies.