What is Premature Withdrawal
Fixed deposits, with a premature withdrawal facility, allow the depositor to close the FD before the date of maturity arrives. This comes as a relief in times of cash crunch.
However, a certain amount may be required to be paid by the depositor as a penalty to the bank. This usually ranges between 0.5% and 1%. Some banks do offer premature withdrawal facilities with zero penalty charges.
However, if the FD is prematurely closed, before completing 7 days from the date of the booking, the bank or the company is not liable to pay any interest.
Penalty on Premature Withdrawal of FD
A penalty is a cost that is charged by the banks or companies when the depositor takes out the money from their bank prematurely or before the date of maturity. This is done to discourage frequent withdrawals and encourage the habit of saving.
How is a Penalty Levied
A penalty is levied on the interest to be paid to the depositor. However, the calculation for the penalty may vary from one bank to another. Most banks follow one of the two methods for penalty calculation as mentioned below:
Suppose a bank charges 1% penalty on premature withdrawals, so the calculation of the interest on premature withdrawal of the FD will be done as per the following illustration.
Case 1
Suppose a customer has invested in an FD of Rs. 1 lakh at a rate of 7% for 2 years. Let us also assume that the interest rate for 1 year is 6.5%. He withdraws the FD after completing 1 year. In one year, he has earned interest @ 7%. But now, the bank shall recalculate the interest at revised FD rates, i.e. 6.5% – 1%= 5.5%. The new rate will be 5.5% and interest shall be paid at this rate instead of the previous 7%.
| Parameters | Details |
| 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 per annum |
| 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
Suppose a customer has invested in an FD of Rs. 1 lakh at a rate of 6% for 2 years. Let us also assume that the interest rate for 1 year at the time of booking is 7% and the penalty rate for premature withdrawal is 1% of the effective rate of interest. The effective rate of interest is the lower of the rates at which the amount was booked and the rate for the tenure that the FD has remained in the bank.
He withdraws the FD after completing 1 year. In one year, he has earned interest @ 6%. But now, the bank shall recalculate the interest at an effective FD rate, i.e. 6% – 1%= 5%. The new rate will be 5% and interest shall be paid at this rate instead of the previous 6%.
| Parameters | Details |
| Principal Amount | Rs. 1 lakh |
| Booked Interest Rate on a Two-year FD | 6 percent per annum |
| Maturity Amount after One Year | Rs. 1,06,136 |
| Interest Rate on One-year FD (at the time of booking an FD) | 7 percent per annum |
| Effective Rate of Interest | 6 percent per annum |
| Premature Withdrawal Penalty Charges | 1 percent |
| Final Rate of Interest Payable | 5 percent per annum |
| Amount Receivable on Premature Withdrawal | Rs. 1,05,095 |
Note: Actual calculation may differ at the time of withdrawal. This example is only for an indicative purposes.
Credit Card against FD – A better alternative to premature withdrawal
Why do we withdraw an FD? Or in other words, why do we break FD? We do it so as to handle a financial requirement. But what if we have a better alternative than to close our active FD account and lose on prospective returns?
A credit card against FD is that alternative which can help you in a financial emergency. Such cards are issued against your fixed deposit. Credit limit to such cards is usually 75-85% of the FD amount (principal). This way, you can cater to your needs while earning interest on your FD.
Paisabazaar Step UP is one such secured credit card against FD which is being offered to the customers in collaboration with the SBM Bank (India) Ltd. You can open an FD for a minimum amount of Rs. 12,000 and enjoy a flexible credit limit (~83% of FD amount).
Apart from helping in managing expenses, this credit card shall also help in building your credit score which shall eventually open more credit avenues for you in the future.