Premature Withdrawal of Fixed Deposits – Breaking a FD: All You Need to Know

Fixed deposits (FDs) have been a go-to investment choice for generations in India, due to their low-risk profile and guaranteed returns. It is a preferred choice for those seeking to invest their savings and earn a fixed interest rate over a specific period. However, situations may arise where you need to withdraw your FD before its maturity date, either to cater to an unforeseen emergency or to invest in a more profitable investment opportunity.

Premature withdrawal of fixed deposits, popularly known as breaking an FD, can incur penalties, reduce the interest rate earned on the deposit, and sometimes even nullify the interest entirely. That’s why it’s crucial to have a clear understanding of the rules, procedures, and penalties associated with breaking a FD prematurely.

In India, banks and financial institutions have different rules and regulations regarding the premature withdrawal of FDs. The penalty or charges for breaking a FD can range from a fraction of the interest earned to the complete loss of interest. Moreover, different banks have different eligibility criteria for the withdrawal of a FD before maturity.

This guide aims to help you navigate the process of premature withdrawal of fixed deposits, including the rules and penalties, eligibility criteria, procedure for breaking a FD, and tax implications.

So, if you’re considering breaking a FD, this comprehensive guide will equip you with all the information you need to make an informed decision.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Understanding Premature Withdrawal of Fixed Deposits

Fixed deposits offering a premature withdrawal option let you close your account before the term ends. This can be helpful when you are in need of liquidity.

But you need to pay the penalty to the bank for withdrawing the money early. The penalty usually ranges between 0.5 and 1%. However, some banks don’t charge a penalty for premature withdrawals.

If you withdraw your money within seven days of opening the account, the bank or company won’t pay you any interest.

How the Penalty Charges are Levied on Premature Withdrawal?

It is essential to be aware of the penalty charges associated with the premature withdrawal of fixed deposits. This can help you plan your finances better and avoid any unnecessary expenses.

Most banks penalise premature FD withdrawal as described below:

Let’s say you put ₹10 lakhs in a fixed deposit for three years at 7.5% per year. However, after a year, you need to withdraw your money. When you initially invested, the interest rate for a one-year term was 7% per year. You have already earned interest at 7.5% for the first year, but if you withdraw early, the bank will recalculate the interest rate based on 7% minus 1%, which is 6% per year. This means you will receive a lower interest payout. Remember that only the interest earned will be subject to a penalty, and your principal amount will remain the same.

The above is the most generally used technique for calculating the penalty for bank fixed deposits.

Some banks compute it as follows:

Suppose you invest ₹10 lakhs in a fixed deposit at a 7% per year interest rate for 3 years. When you book the FD, the interest rate for 1 year is 7.5%, and if you withdraw early, you will be charged a penalty of 1% of the effective interest rate.

The effective interest rate is the lower of the interest rates at which the fixed deposit was initially booked and the rate applicable for the period the FD held in the bank. So, if you withdraw the FD after 1 year, you will have earned interest at a rate of 7% for that year. However, the bank will recalculate the interest rate at an effective FD rate of 6% per year. This is the previous rate of 7% minus the 1% penalty, and you will receive interest payments at this rate instead of the 1-year FD interest rate of 7.5% per year (at the time of booking).

Understanding the Process of Closing an FD Prematurely

You have two options for withdrawing your Fixed Deposit before the maturity date: offline or online.

To make an offline withdrawal, go to your bank branch and fill out a form for closing your FD account early. You must also complete the required  paperwork and hand over your Fixed Deposit Receipt.

If you prefer a digital option, keep in mind that certain banks only offer online withdrawals for deposits made online. To utilise the online option for premature withdrawal of fixed deposits, check that net banking is enabled.

How to Break Fixed Deposits Online?

1. Login to your lender’s official website.

2. Navigate to the website’s service request page.

3. Then click on “Premature Closure of Fixed Deposits.”

4. Enter the necessary information, such as your FD number, and submit a request to cancel the fixed deposit.

How to Break Fixed Deposits Offline?

1. Fill out the premature FD withdrawal form and return it to the branch. Check that all of the necessary information, such as the FD number, name, and bank account information, is correctly provided.

2. Submit the premature FD withdrawal form together with documents such as an Aadhaar card and PAN card, among other things.

3. Next, your request will be processed by the bank and your funds will be sent to your account when the FD is closed, either online or offline via a cheque.

Conclusion

Fixed deposits are a popular investment option in India due to their low-risk profile and guaranteed returns. However, there may be situations where you need to withdraw the FD prematurely. Therefore, it is essential to understand the rules, procedures, and penalties associated with the same. Different banks have different criteria and penalty charges for premature withdrawal. Penalty charges can reduce the interest rate earned on the deposit and sometimes even nullify the interest entirely. This guide provides a comprehensive understanding of breaking an FD in India, covering rules, penalties, and procedures for breaking an FD. Hence, it is essential to understand the penalty charges and the calculation method used to avoid unnecessary expenses. Overall, this guide equips you with all the information you need to make an informed decision while you break an FD.

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