Many people in India who don’t like risks usually invest in fixed deposits. The rate of interest paid on fixed deposits is fixed, whereas the risks with mutual funds come from the market. Because FDs are made for a long stretch, individuals might still need to withdraw their capital before planned. At this time, premature withdrawal centres are a useful option.
Penalties on Premature Withdrawal
If you take your FD before the maturity date, banks usually penalise the interest you earned. As a result, it allows savings to remain largely intact, which supports long-term saving behaviour. Normally, the penalty varies between 0.5% and 1% of the interest amount, although some banks have special conditions where withdrawal is free of penalty. If you close your FD within 7 days of booking it, most banks won’t give you any interest.
How Penalty Calculation Works?
Method 1: Penalty on Original Interest Rate
The bank recalculates the interest by applying the penalty to the interest rate applicable for the period the deposit remained with the bank. Example:
- Principal amount: ₹1 lakh
- Original FD: 7% for 2 years
- Premature withdrawal: After 1 year
- Interest rate for 1-year FD: 6.5%
- Penalty: 1%
- Interest rate after penalty = 5.5%
- Amount receivable: ₹1,05,614 (instead of ₹1,07,186 at the original rate)
Method 2: Penalty on Effective Interest Rate
Here, the bank first determines the “effective rate” (lower of the contracted rate or the rate for the actual period the FD remained with the bank) and then applies the penalty. Example:
- Principal amount: ₹1 lakh
- Original FD: 6% for 2 years
- Premature withdrawal: After 1 year
- Interest rate for 1-year: 7%
- Effective rate: 6% (lower of 6% and 7%)
- Penalty: 1%
- Final interest rate: 6%-1 % = 5%
- Amount receivable: ₹1,05,095 (instead of ₹1,06,136 at the original rate)
Bank-Specific Premature Withdrawal Policies
1. State Bank of India (SBI)
- For retail FDs up to ₹5 lakh: 0.50% penalty across all tenures
- For retail FDs above ₹5 lakh but below ₹1 crore: 1% penalty across all tenures
- The effective interest rate will be the lower of:
- 0.50-1% below the rate applicable at the time of booking for the period the FD remained with the bank
- 0.50-1% below the contracted rate, whichever is lower
- No interest is paid on deposits withdrawn before 7 days
2. ICICI Bank
ICICI Bank applies different penalty rates based on tenure and deposit amount:
| FD Tenure | Penalty for <₹5 crore | Penalty for ≥₹5 crore |
| Less than 7 days | No interest | No interest |
| 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% |
3. HDFC Bank
- The effective interest rate for premature withdrawal will be the lesser of:
- The base rate for the original tenure
- The base rate applicable for the period the deposit remained with the bank
- 1% penalty on applicable rates for premature withdrawals, partial withdrawals, and sweep-ins
- No interest if withdrawn before 7 days
Alternatives to Premature Withdrawal
Credit Card Against Fixed Deposit: Instead of breaking your FD and losing interest, consider using a credit card secured against your fixed deposit. These secured credit cards typically offer:
- Credit limit of 75-85% of your FD amount
- Continued interest earnings on your FD
- Ability to meet financial emergencies without disturbing your investment
- Opportunity to build or improve your credit score
For example, Paisabazaar’s Step UP secured credit card, offered in collaboration with SBM Bank (India) Ltd, allows you to open an FD for a minimum amount of ₹12,000 and provides a credit limit of approximately 83% of the FD amount.
Fixed Deposits Without Premature Withdrawal Facility
- ICICI Bank Fixed Deposits (₹2 crore and above)
- HDFC Bank Fixed Deposits (₹5 crore and above)
- PNB Uttam Fixed Deposits: Non-Callable (Above ₹15 lakh)
- Standard Chartered Fixed Deposits (₹2 crore and above)
How to Close an FD Prematurely
Offline Method
- Visit your bank branch
- Fill out the premature withdrawal form
- Submit the required documents
- Surrender your Fixed Deposit Receipt
Online Method
- Log in to your internet banking account
- Navigate to the fixed deposit section
- Select the FD you wish to close
- Follow the instructions for premature withdrawal
Important considerations for online withdrawal:
- Many banks allow online premature withdrawal only for deposits that were originally booked online
- Internet banking must be enabled
- Some banks may have additional verification steps
Conclusion
Getting your money out early from a fixed deposit allows you to respond to emergencies, but you won’t earn as much interest, and you may also have to do a lot of paperwork. It is possible to borrow against your FD by taking out a loan or credit card using it as collateral, which allows you to access the funds without missing out on interest. Reading the rules about terminating your investment early lets you decide if it’s worth it, considering any fees or negative results.
Written by Promita Ghosal
