We already know that Indians love putting their money into fixed deposits.
Clearly, FDs have been around for a long time and are still the go-to option for keeping extra cash safe and secure. What’s more, the interest rates are once again on the upswing. Chartered Accountant Abhay Asknani says, “Most banks have increased interest rates on fixed deposits, presenting a great opportunity for depositors, especially those with a conservative approach, to secure better and guaranteed returns on these saving tools. However, it's crucial for investors to acquaint themselves with the different types of FDs and regulations regarding premature withdrawals in case of emergencies.
What Is Premature FD Withdrawal?
Premature withdrawal refers to withdrawing invested funds before the maturity period ends, also known as ‘breaking the FD’. Depositors may choose premature withdrawal in case of urgent financial needs. Banks typically allow premature withdrawal, but impose a penalty, usually ranging from 0.5 per cent to 1 per cent, although some banks waive penalties entirely. This waiver applies not only to cash emergencies but also if depositors opt for alternative investment options offered by the same financial institution.
Fixed Deposit Categories: Fixed deposits (FDs) are typically categorised as cumulative and non-cumulative. In a cumulative FD, neither banks nor non-banking financial companies (NBFCs) pay any interest during the deposit period. Instead, the accrued interest is added to the principal amount and paid out upon maturity.
Additionally, some fixed deposits offer a premature withdrawal facility, allowing depositors to close the FD before its maturity date, providing relief during cash crunches. However, a penalty may be levied by the bank,. It's worth noting that some banks may offer premature withdrawal facilities with zero penalty charges.
It's essential to be aware that if the FD is prematurely closed within 7 days from the booking date, the bank or company may not be liable to pay any interest. FD tenures can range from 7 days to 10 years.
Final Maturity Amount: The penalty for premature FD withdrawal is deducted from the interest earned on the FD amount, thereby reducing the interest rate. This decreased interest rate affects the final maturity amount, which may be calculated using simple or compound interest, depending on the terms.
Premature Withdrawal Rules: Although FDs permit premature withdrawal, lenders impose penalties for closing deposits ahead of schedule. However, some banks waive penalties if the withdrawn amount is reinvested in alternative options provided by them. Depositors can close their FDs online through the bank or NBFC's mobile app, via net banking, or by visiting a physical branch. Here are some guidelines on penalty charges for premature withdrawals of fixed deposits at leading public banks, private banks, and NBFCs.
Closure Penalties And Lower Interest Rates: FD interest rates are typically higher for longer terms. If you withdraw your FD early, you'll be charged interest according to the rate at the time of account opening, potentially resulting in lower returns.
Potential Decrease In Interest Rates: Interest rates on new FDs may not be as favourable as when you initially opened your account, especially in certain economic conditions. By withdrawing your FD prematurely, you risk settling for lower interest rates with a new FD.
Consider Taking A Loan Against Your FD: Instead of breaking your FD, consider taking a loan against it for immediate cash. Loans against FDs usually offer better interest rates than personal loans, allowing you to continue earning interest on your FD.
Potential Decrease In Overall Earnings: Premature FD withdrawals may lead to decreased overall earnings due to penalties and charges. Carefully assess the costs and benefits before making any investment decisions.
How To Avoid Penalties on Early FD Withdrawal:
Choose Flexi FDs: Opt for banks offering flexible fixed deposits, allowing partial withdrawals without penalties, providing liquidity while preserving the deposit.
Utilise Loans Against FDs: Take advantage of loans against your FD, offered by many financial institutions. This allows you to meet financial needs without breaking the FD and incurring penalties.
Maintain An Emergency Fund: Keep a dedicated emergency fund separate from your FD to cover unexpected expenses, reducing the need for premature FD withdrawals and avoiding associated penalties.
