Fixed deposits are the preferred choice for risk-averse investors, along with those who wish to strike a balance in their investment portfolio. This investment option allows customers to earn guaranteed returns at pre-specified interest rates without having to bear market-related risks that come with other investment options like mutual funds.
Fixed Deposits can be broadly categorized into two types – with premature withdrawal and without premature withdrawal facility.
Fixed deposits, with 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 facility 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.
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.
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.
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 |
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 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 per cent 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 per cent per annum |
| Effective Rate of Interest | 6 per cent per annum |
| Premature Withdrawal Penalty Charges | 1 per cent |
| Final Rate of Interest Payable | 5 per cent 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 indicative purpose.
Fixed deposits without premature withdrawal are usually with the higher deposit amount and the depositor is not allowed to close the FD before maturity. The rate of interest can be lower than the ones with a premature withdrawal option.
Some banks that have this facility are:
Banks such as ICICI Bank, State Bank of India (SBI), Kotak Bank, HDFC Bank, etc. have specific terms and conditions for those who are willing to withdraw their money from the fixed deposits before the completion of the maturity period.
To exercise the premature withdrawal facility, there are two ways, viz. offline and online.
When it comes to the traditional method of offline withdrawal, customers are required to visit the branch of their respective banks and get their FD closed prematurely. For this, they are required to fill the form, submit documents, and surrender their Fixed Deposit Receipt.
Important points to be considered for the online mode:
Given below is a comprehensive comparison of the rules for premature withdrawal on Fixed Deposits by the leading banks in India:
For more details about the withdrawal process and documents required for the same, call the customer care team of SBI at toll-free number 1800-425-3800, 1800-11-2211 and toll number 080-26599990.
Click to know more about SBI FD Rates & Schemes
On premature withdrawal on the domestic, Non-Resident Rupee (NRE) and Non-Resident Ordinary Rupee (NRO) accounts fixed deposits, ICICI Bank levies penalty at the following rates:
| FD Tenure | Premature Withdrawal Penalty | |
| Less than Rs. 5 crore | Rs. 5 crore & above | |
| Less than 7 days | No interest is paid | No interest is paid |
| Less than 1 year | 0.50% | 0.50% |
| 1 year to less than 5 years | 1.00% | 1.00% |
| 5 years and above | 1.00% | 1.50% |
The effective interest rate is calculated as the lower of the rate applicable for tenure for which the FD remained in the bank or contracted rate of the FD.
Click to know more about ICICI Bank FD Rates & Schemes
The bank allows depositors to withdraw their invested amount before the completion of the maturity period via net-banking or simply by visiting the branch.
Click to know more about HDFC FD Rates & Schemes
When someone chooses to withdraw FD prematurely, one stands to lose on various fronts. These are explained here:
