Unforeseen financial commitments may tempt you to withdraw your FD’s accumulated funds at any time. Though it seems to be a quick fix for an issue, neglecting the effects of premature withdrawal of fixed deposits certainly leads to financial losses that can hurt your investment goals.
Read along to know the specifics of premature withdrawal facilities in FDs.
What is Premature Withdrawal of Fixed Deposit?
Let’s assume you decided to start a fixed deposit with Max Life Insurance and deposited an initial balance of ₹2 lakhs. Now, due to an emergency medical reason, you wish to break the FD terms and withdraw the deposited money before the maturity term.
In the above scenario, you can opt for a partial premature withdrawal for up to 70% – 90% of the deposited sum. This feature is termed premature withdrawal, and any depositor may leverage from it when they have invested in any fixed-period instruments. The applicable penalty is levied on the final interest sum or withdrawal amount, depending on the institution. Here, you can take the assistance of an FD premature withdrawal penalty calculator to compute the loss and then make a decision.
Implications of Withdrawing an FD before Term
Most financial institutions charge a fixed percentage of the withdrawal amount when their FD customers make partial redemptions before the maturity period. This margin is expected to hover between 0.5% and 1% when levied on the interest rate.
For instance, the SBI premature FD closure charges include a 0.5% penalty for term deposits of less than ₹5 lakhs. In case there is a premature withdrawal request for FD accounts with more than ₹5 lakhs initial deposit, then this penalty becomes 1% of the investment.
However, these days many banks and NBFCs tend to not charge any penalty for premature withdrawal of fixed deposits when the depositor can state a valid reason. But what they do instead is reduce the interest as compared to the previously promised rate.
Thus, early withdrawal is bound to inflict substantial financial losses. The details about this thing have been explained in the following section.
Disadvantages of Premature Withdrawal
Here you can witness some of the common drawbacks one usually experiences after the premature closure of FD:
As discussed above, the penalties for premature withdrawal of fixed deposits are usually fixed percentages. But at times, it can be flat rates, depending on the financial institution you are investing with.
Loss of Interest
Cumulative returns of your FD investments are entirely dependent on interest earnings. Therefore, when you decide to go for a significant premature withdrawal, your whole investment idea shatters. This results in a loss of wealth over time due to the effects of inflation.
In India, you are not required to pay taxes for up to ₹40,000 annual interest earnings against FD deposits. However, if partial withdrawals get issued before the tenure’s end, then this rule becomes invalid. It casts an overall impact on your investment portfolio.
Disruption of a set financial plan
Many individuals wish to fulfil their long-term goals through FDs. Therefore, they select a suitable lock-in period for an FD scheme and keep on waiting with defined expectations. However, premature withdrawal of the fixed deposit disturbs one of the crucial steps of their strategic financial planning.
Premature withdrawal of fixed deposit calls for elaborate paperwork. This becomes a cause of trouble, especially when someone is trying to find newer avenues for emergency funds.
If you are on the verge of breaking an existing FD, think again. You may have to wash your hands off from substantial profits.
Premature FD Closure Charges of Top Banks
|Bank Name||Premature Withdrawal Rate|
|SBI Bank||0.5% – 1%|
|ICICI Bank||0.5% – 1%|
|Punjab National Bank||1%|
|IDFC First Bank||1%|
What are the Alternatives to Withdrawing an FD?
The foremost agenda that tempts you to keep aside funds for fixed deposits is earning guaranteed returns. This goal gets affected when you resort to premature closure of FD. Though it may seem to be the only option at times of distress, if you stay aware of other options, you may eventually avoid redeeming the deposits before maturity.
The alternative options include:
Using a credit card
Credit card usage allows you to easily apply for loans in emergencies. When your past records remain flawless, the lenders gain confidence in your repayment capacity and sanction the requested money readily.
Approaching a contingency account
Emergency funds equivalent to the living cost of your family for at least 6 months can help you sustain a financial crunch. Hence, focus on building contingency account(s), which will, later on, protect your investments.
Availing of loans against FDs
This is another excellent measure for someone needing an emergency fund flow. Loans against fixed deposits come at lower interest rates when compared to other unsecured loans. Moreover, financial institutions offer a loan against 90% of an FD deposit these days.
Liquidating other investments
Stock market possessions, bonds, and physical assets like gold, etc., can be sold, making a profit margin at times of emergencies. Although these elements would have strengthened your portfolio, utilising them wisely will secure gains.
FD Without Premature Withdrawal Facility
Fixed deposits that involve significantly high amounts may not offer premature withdrawal facilities. These FDs are referred to as non-callable FDs.
Generally, the banks issuing these FDs set a lower minimum value, say, ₹15 lakhs. Depositors who intend to buy these securities are restricted by bank authorities to make partial withdrawals before maturity. The banking authorities set strict regulations because these cumulative deposits are a vital component of asset-liability management.
Nevertheless, these FDs can also be prematurely withdrawn if certain conditions arise, such as:
- The depositor desires to modify the deposit of nature within the first 15 days of the initial deposit
- Investor meets an unfortunate death
- The asset-holding institution has completed related deposits erroneously
Frequently Asked Questions
The penalty applied to a depositor for making premature withdrawals has to be sanctioned as a deduction against TDS. This is because FD is a taxable earning, while the penalty is a direct cost.
Many banks do not levy charges to investors who wish to break their FDs before the maturity term. However, a financial institution may or may not pay any interest for the initial deposits if the individual closes FD within 7 days.
There is no such particular upper limit for senior citizens. However, they must aim not to earn more than ₹50,000 through FDs annually. Following this tactic will allow them to file I-T returns and leverage the tax exemption provisions of Section 80 TTB.