Premature FD Withdrawal: Rules and Penalty Charges

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 against your loan.

Disadvantages of Premature FD Withdrawal

The cons of early FD withdrawals are: 

1. Reduced Returns 

Early FD withdrawal usually comes with penalty charges. With Ujjivan, if you withdraw your FD within 6 months from the time of deposit, 1% penalty would be levied on the prevailing rate basis of the tenure. Any withdrawals made after 6 months won't incur any penalties. Please note that early FD closure is applicable only for Callable FDs.  Let's understand this with an example. 

Let's say you have booked an FD for 1 year with Ujjivan. The applicable interest rate as on 24 October 2024 is 8.25%. Due to a medical emergency, you want to break your FD within 6 months (let's say 90 days). The applicable interest rate for 90-day Ujjivan FD is 4.75%. A 1% penalty fee would be levied on the 90-day FD. So, you will be eligible for 4.75% - 1% = 3.75% interest rate.

In another scenario, let's say you foreclose your fixed deposit with 1 year but after 6 months (9 months). The prevailing interest rate for a 9-month Ujjivan FD is 7.50%. Since, you have foreclosed your account after 6 months, no premature withdrawal penalty fee would be imposed. So, you will be eligible to receive 7.50% interest rate on your deposit, 0.75% lower than the 1-year FD rate.