Fixed deposit (FD) offers a secure and predictable way to grow your savings. The promise of guaranteed returns at a fixed interest rate makes them a popular choice for risk-averse investors. However, life can be unpredictable, and circumstances might arise that require you to access your FD funds before the maturity date. This is where the option of premature withdrawal comes in, but it is a decision that needs careful consideration.
What is premature withdrawal fixed deposit?
Premature withdrawal of fixed deposit refers to the early closure of an FD account before the agreed-upon maturity date. This option allows investors to access their funds in urgent situations or to reinvest at more favourable rates. However, it typically incurs penalties and may impact the overall returns.
How to break a fixed deposit account before maturity
- Visit the nearest branch, contact customer service, or access premature withdrawal options through internet banking
- Complete necessary documentation
- Pay the applicable penalty charges, which are typically deducted from the principal amount
Premature withdrawal of FD - Penalty charges
Most financial institutions levy a 0.5%-3% penalty charge for the premature withdrawal of FDs. This penalty charge is calculated on the interest rate applicable to the fixed deposit. In other words, this penalty charge reduces the fixed interest rate initially offered to the investor while booking an FD.
Let us understand this with an example
Let's say you invest Rs. 1,00,000 in a 5-year FD with an interest rate of 8% p.a. If you withdraw the money after 2 years, the financial institution might impose a penalty by reducing the applicable interest rate to 6% p.a. In this case, the interest earned for the 2 years would be calculated at 6% instead of 8%, resulting in a lower overall return.
Some financial institutions might waive penalties for premature withdrawals due to:
- Emergencies
- Reinvestment within the same institution
Note: Penalty rates for premature FD withdrawals differ significantly between financial institutions.
Disadvantages of premature withdrawal
- Reduction in overall returns due to penalty charges
- Loss of accumulated interest income
- Disruption to your financial planning goals
- Potential impact on your credit score if funds are withdrawn to cover debt payments
How to avoid the penalty on premature withdrawal of FD
- Opt for a shorter tenure FD
- Utilise the sweep-in facility for liquidity needs
- Consider partial withdrawal instead of closing the entire FD
- Consider a loan against your FD to meet immediate financial requirements. Financial institutions like Bajaj Finance offer loan against fixed deposit
Does every financial institution charge the same penalty for premature withdrawal of FD?
No, penalty charges for premature withdrawal of fixed deposit vary among financial institutions. Bajaj Finance penalty structure may differ from that of other financial institution, impacting the overall cost of early withdrawal.
Conclusion
Premature withdrawal of Fixed Deposits can provide liquidity in emergencies but comes with penalty charges. Understanding the process, charges, and alternatives are crucial for making informed financial decisions. Evaluate your options carefully to minimise the impact on your financial goals and returns.
