Premature FD Withdrawal: Rules and Penalty Charges
December 03, 2024
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.
Tenure | Expected Interest | Withdrawal Date | Received Interest |
---|---|---|---|
1 Year | 8.25% | 90 days | 3.75% |
1 Year | 8.25% | 9 months | 7.50% |
Disclaimer: Interest rate as on 24 October 2024. Ujjivan SFB does not charge any premature withdrawal fee for any withdrawals made after 6 months from the time of deposit. For any doubt, please contact Ujjivan SFB.
2. Long-Term Goals Disruption
Early FD withdrawal can affect your financial journey, and impact the long-term goals and plans that you might have. Consider these before opting for a premature withdrawal of fixed deposit. You can use Ujjivan SFB Fixed Deposit Calculator to check your FD returns. That would give you a better idea about how much interest you may lose if you withdraw your FD early.
3. Penalties and Charges
As illustrated above, 1% premature penalty fee would be imposed on the prevailing interest rate pertaining to the tenure, if you foreclose your FD before the maturity date. The best part of opening a fixed deposit with Ujjivan Small Finance Bank is that no penalty charges are imposed if you break your FD after 6 months from the time of 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 FD, 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 Bankoffers in terms of fixed deposits. Visit our website now and start investing in your choice of FD.
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.
2) Are there penalties for premature withdrawal?
Yes, most banks charge a penalty usually up to 1% which might reduce the overall interest earned. Kindly contact your bank for more details.
3) Can I partially withdraw from my fixed deposit?
Some banks allow partial withdrawals without closing the entire FD account. Check with your bank for more information.
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