What is Premature Withdrawal of Fixed Deposit

Please be aware that certain banks only allow online withdrawals for deposits that were made through their websites. Moreover, in order to make online withdrawals from fixed deposits, the internet banking feature needs to be activated. 

Penalty Charges for Premature Withdrawal of FD

1. Most banks charge for premature withdrawal of the fixed deposit. This is usually 0.5% - 1.00% of the interest rate. 
2. However, some banks do not charge any penalty in case of an emergency or if you wish to invest the same amount in another investment option provided by the bank. 
3. In addition, the rate of interest is reduced from the fixed interest initially granted when an investor closes an account early. Let's take an example where an investor

1. The interest earned was six percent annually for the first year. The interest paid to the investor will be 6% annually rather than 8% annually if the investment is withdrawn before the full year has passed. 
2. Hence, unless necessary, premature withdrawal of fixed deposit results in a great loss for the investor. 

1. Certain banks require deposits to be taken out within six months of the account opening date; if this is done, no interest is given. 

Premature Withdrawal Charges of Top Banks

HDFC Bank FD Premature Withdrawal

1. HDFC Bank allows its customers to withdraw their fixed deposits before maturity. There are two methods to use the premature withdrawal facility: offline and online. 
2. You can choose to withdraw your FD partially or fully.  
3. Premature withdrawal of a fixed deposit will result in an effective interest rate equal to the lesser of the following: either the base rate that was in effect for the whole investment period or the base rate for the first term for which the money was booked. 

1. For premature withdrawal of a fixed deposit (partial and sweep-in), HDFC Bank charges a penalty of 1% on the applicable rates.  
2. The interest will not be paid for the premature closure of an FD within seven days of booking. 

SBI FD Premature Withdrawal

1. For fixed deposits up to Rs.5 lakh, State Bank of India (SBI) will levy a penalty of 0.50% on premature closure.  
2. For premature withdrawals of fixed deposits of more than Rs.5 lakh, a penalty of 1% will be applicable.  

1. The interest rate will be 0.50% or 1% less than the rate effective at the time of deposit for the duration the deposit was maintained with the bank, or 0.50% or 1% less than the contracted rate, whichever is less. 
2. Fixed deposits held for less than seven days will not be paid any interest.

Kotak Mahindra Bank FD Premature Withdrawal  

1. Kotak Mahindra Bank imposes a penalty of 0.50% on premature closure of fixed deposits of 181 days and above.  
2. The interest shall not be payable on a fixed deposit that was prematurely closed within 7 days of being booked.  

1. In this case, only the principal amount will be repaid. 

ICICI Bank FD Premature Withdrawal

1. In the event that a fixed deposit is closed early, interest will be calculated at the rate in force for the time the deposit was held with ICICI Bank, whichever is lower. A penalty as shown in the following table will also be applied. 

Disadvantages of FD Premature Withdrawal

Some of the disadvantages associated with closing a fixed deposit before maturity are as follows: 

1. Penalty - If you wish to take your FD out before it matures, you will have to pay a penalty. As a penalty, a bank typically levies 0.50% to 1.00% of the interest. The bank reserves the right to alter the applicable penalty. 
2. Hinders Financial Growth - When the fixed deposit matures, interest will be paid, providing guaranteed returns. Your income flow will be interrupted if you choose to stop your FD before it matures, which may have an effect on your spending plan. 

1. Time-consuming Process - The process involved in closing a fixed deposit prematurely is time-consuming and complicated. You will have to meet bank representatives, fill out various forms, submit documents, and more.  
2. Interest is Lost - If you withdraw your fixed deposit prematurely, you will not receive the exact amount determined by the fixed deposit's interest rate and term. Therefore, you must consider the penalty charges to calculate the amount you will get after premature closure.  

How to Avoid the Penalty on Premature Withdrawal of FD

Fixed Deposit (FD) is considered to be one of the most popular investment tools. You can invest in a fixed deposit scheme for up to 10 years and earn attractive interest which would help you take care of your long-term financial requirements.

However, due to immediate cash crunch, there might be times when you may have to prematurely withdraw from your fixed deposit account, which would attract a penalty. Hence, in order to avoid that, there are certain ways through which you can avoid penalty for premature withdrawal of FD. We will have a look at those methods given below.

1. FD Laddering - FD laddering is a process where you apply for various fixed deposit schemes with different maturity periods. You can take a lumpsum amount and divide them into smaller investments by opening multiple fixed deposit accounts. For example, if you have a lumpsum amount of Rs.5 lakh, you can invest it in five different smaller FDs with maturity periods ranging between one year and five years. In this way you will not only long-term fixed deposit accounts, but also short-term accounts which will ensure you have enough liquidity.
2. The laddering method is beneficial since it may spare you from having to fulfil your immediate financial needs and avoid having to take any premature withdrawals. If you must take money out early, it will only be to the extent that you actually need it. For instance, you can prematurely withdraw Rs. 1 lakh from each of your two FD accounts if you require, say, Rs. 2 lakh. Even though there might be a penalty associated with those two accounts, the rest will still earn interest on your deposits. At maturity, you can then decide to reinvest in order to boost your cash flow. 
3. Loan against FD - You can borrow against the amount of your fixed deposit rather than taking early withdrawals from your FD account. The majority of lenders offer this service and tack on interest rates of 1% to 2% over the interest earned on the deposit. The interest rate charged will vary from bank to bank, thus before using this service, it is advised that you ask any questions of your bank. The majority of lenders permit borrowers to withdraw up to 90% of their initial deposit. 
   
4. Sweep-in facility - This facility allows the lender to credit any sum in excess of the amount you had stipulated from your savings account to a sweep-in account. On opening a sweep-in account, the tenure may range between one year and five years, and you are likely to earn a higher interest on the amount deposited to your account. However, in order to be eligible for this facility, you might be required to open an FD account with a minimum amount of Rs.25,000 in your savings account. This facility offers better corpus and ensures that your immediate cash requirements are met without you having to touch your regular investments. You can withdraw as per your convenience without having to pay any penalty whatsoever.