Premature FD Withdrawal: Rules and Penalty Charges

October 16, 2024

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Premature withdrawal of Fixed Deposit (FD) means you partially or completely withdraw your deposit amount before the maturity period. Banks offer such facilities for callable FDs, where you can withdraw funds before the deposit tenure. However, there are certain implications of premature FD withdrawal.

In this blog, we have explained the advantages and disadvantages of early withdrawal of FDs. Before we move on, here's an interesting fact that you may not be aware of. As per RBI rules, you can now prematurely withdraw FD of up to ₹1 crore.

Advantages of FD Premature Withdrawal

Let us look at some pros of early FD withdrawals:

1. Immediate Access to Funds

Prematurely withdrawing your fixed deposit ensures that money is available right when you need it, offering a financial lifeline in urgent situations. For example, consider a situation of sudden medical emergency where quick cash is crucial.

2. Financial Flexibility

Premature withdrawal of fixed deposits provides you with the opportunity to adjust your investment strategy if needed, especially if you want to spread your lump sum FD into multiple FDs (FD laddering strategy) or if you're not happy with interest rate offered by your current bank.

For example, if you have ₹15 lakh in a single FD with low returns, you can either withdraw the fund and reinvest in an FD with higher returns or break it into multiple FD accounts.

3. Paying Off Debts

If you have a high-interest debt accumulating and you need to reduce your financial burden, you can opt for premature withdrawal of fixed deposits. For example, if you owe ₹5 lakh at 12% interest, you can use your FD funds to clear this, saving you from paying higher interest.

Disadvantages of Premature FD Withdrawal

The cons of early FD withdrawals are:

1. Reduced Returns

Breaking your FD early usually means losing part of the interest you would have earned if the deposit had matured. In this example, we have considered the interest implications you may face if you foreclose your Digital FD with Ujjivan SFB. In the first scenario, the person has closed the FD within 6 months (90 days), and in the second scenario, the person has closed the FD after 6 months but before 1 year (8 months).

Actual Term	Expected Interest	Received Interest
1 Year	8.25%	3.75%
1 Year	8.25%	7%

*Interest rate as on 5 September 2024.

The prevailing interest rate for a 1-year FD is 8.25%. However, the person opted for premature closure i.e. 90 days. Prevailing interest rate for a 90-day FD is 4.75%. However, a 1% penalty would be levied because the withdrawal was made before 6 months from the time of deposit. Hence, the person would eligible for 3.75% interest.

In the second situation, the person has closed the FD within 1 year but after 6 months. As per Ujjivan SFB's policy, no penalty fee would be levied. However, the person would be eligible for only the prevailing interest rate as applicable for 8-month tenure, which is 7%.

2. Penalties and Charges

Early FD withdrawal usually comes with penalty charges. With Ujjivan, if you withdraw the amount within 6 months, you may have to pay a penalty of up to 1% on the prevailing rate basis of the tenure. For example, if you have booked an FD for 1 year, the prevailing interest rate as on 5 September 2024 is 8.25%. However, if you close the FD after 60 days from the time of deposit, you will receive 3.25% as interest. Here's how it's calculated:

Prevailing Interest Rate for 60 days: 4.25%
Premature withdrawal penalty before 6 months: 1%
Eligible interest rate: 3.25%

Point to note: Ujjivan SFB does not levy any premature penalty for withdrawals made after 6 months from the time of deposit.

3. Long-Term Goals Disruption

Early FD withdrawal can affect your financial journey, and impact the long-term goals and purchase plans that you might have made for yourself. Consider these before opting for a premature withdrawal of fixed deposit.

Do All Fixed Deposits Offer Premature Withdrawal?

Premature FD withdrawal is only applicable for callable Fixed Deposits. Such Fixed Deposits don't come with any lock-in period. However, this facility is not applicable for non-callable FDs like PLatina Fixed Deposit, where you cannot withdraw funds before the stipulated lock-in period. But there are certain exceptions.

As per RBI guidelines, depositors can prematurely withdraw funds from non-callable FDs during specific situations like bankruptcy, court order, business liquidation, or the depositor's demise. However, the penalty could be higher for premature withdrawal of non-callable Fixed Deposits.

Should You Opt for Premature FD Withdrawal?

When you invest in Fixed Deposit, you should try to invest keeping your long-term goals in mind. Premature withdrawal of FD can have significant consequence including loss of interest income. This may disrupt your financial goals.

Of course, if there’s an emergency and you need immediate cash, you can opt for early withdrawal of deposit. But, staying invested for the long-term can help you benefit from the power of compounding (earning interest on interest). Consider these factors before deciding.

Final Thoughts

While there are several reasons to opt for an early FD withdrawal, it's crucial to weigh in the potential downsides like lost interest income and penalties. Consider all the factors before opting for premature FD withdrawal.

For maintaining a robust financial health without frequent disruptions to your investment plans, consider exploring what Ujjivan Small Finance Bank offers in terms of flexible fixed deposits solutions. Visit our website now.

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FAQs

1) What is an early FD withdrawal?

Premature withdrawal of fixed deposit is a situation when you withdraw money from your fixed deposit before its maturity date. This facility is usually available for callable FDs - fixed deposit schemes that don't come with any lock-in period.