Premature Withdrawal of Fixed Deposit

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.

FD without premature withdrawal facility

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:

• ICICI Bank Fixed Deposits (Rs. 2 crore and above)
• HDFC Bank Fixed Deposits (Rs. 5 crore and above)
• PNB Uttam Fixed Deposits: Non-Callable (Above Rs. 15 lakh)
• Standard Chartered Fixed Deposits (Rs. 2 crore and above)

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.

How to Close FD Prematurely

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:

• Many banks allow online withdrawal only for deposits that were booked online in the first place (e.g. SBI e-TDR/e-STDR)
• Internet banking should be enabled to use online mode for premature withdrawal of fixed deposit

Given below is a comprehensive comparison of the rules for premature withdrawal on Fixed Deposits by the leading banks in India:

Premature Withdrawal of SBI Fixed Deposit

• The effective interest rate will be lower of 0.50-1% below the effective rate applicable at the time of booking the FD for the period the FD remained with the Bank or 0.50-1% below the contracted rate, whichever is lower
• For retail term or fixed deposits amount up to Rs. 5 Lakh, the bank will charge a penalty of 0.50% for all tenure for premature withdrawal
• For retail fixed deposits amount above Rs. 5 Lakh but below Rs. 1 crore, the applicable penalty is 1% for all tenures
• The bank will not pay interest on deposits that remain for a period of fewer than 7 days

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

Premature Withdrawal of ICICI Bank Fixed Deposit

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

Premature Withdrawal of HDFC Bank Fixed Deposit

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.

• The effective rate of interest applicable for premature withdrawal of fixed deposits will be lesser of:
  • The base rate for the contracted/original tenure for which the amount has been booked, or
  • The base rate of interest applicable for the period for which the amount has been invested with HDFC Bank

• Base Rate is the rate of interest applicable on Fixed Deposits on the day of booking the deposit
• For premature withdrawals, partial withdrawals, and sweep-ins, the bank will levy 1% penalty on the rates applicable
• No interest is paid if the FD is withdrawn before 7 days of booking

Click to know more about HDFC FD Rates & Schemes

Disadvantages of Premature Withdrawal

When someone chooses to withdraw FD prematurely, one stands to lose on various fronts. These are explained here:

• Penalties: In case of premature withdrawal, the investor has to pay a certain amount as a penalty to the bank. The amount charged by the bank as a penalty is generally from 0.50 % to 1.00 % of the interest. The penalty may change over time as and when the bank decides to update its policies
• Loss of Interest: When an individual withdraws before maturity, they must know that they will not get the exact amount based on the rate of interest and duration of the fixed deposit because it has withdrawn before the tenure that was decided on the date of booking the FD. While calculating the amount you will receive after premature withdrawal, make sure to include the penalty charges as well
• Halt to the Financial Growth: Fixed Deposits are designed to provide the depositor with guaranteed returns in the form of interest on the date of maturity. If you have planned cash flow with a series of FDs, the premature withdrawal of the scheme will disturb your cash flow and might affect your budget
• Premature Withdrawal is a Cumbersome Process: Along with everything else, it is a fact that a premature withdrawal of the deposit is a cumbersome process and not a simple transaction. One has to go through several steps to complete the process. The formalities of the process include filling forms, meeting the officials of the bank, submitting documents, etc.