Premature Withdrawal of Fixed Deposit

Calculate how the penalty levied on premature withdrawal of fixed deposit affects your profits.
FD Premature Withdrawal
4 mins
20 February 2024

Fixed deposits have long been a favored investment avenue, offering a secure and predictable way to grow one's savings. However, circumstances may arise where the need for funds prompts individuals to consider premature withdrawal of their fixed deposits. This financial decision, while providing immediate liquidity, comes with consequences that extend to the interest earned on the deposit. Understanding the implications of premature withdrawal is crucial for investors, as it can impact the overall returns on their investment. In this article, we will understand the dynamics of premature fixed deposit withdrawal and its subsequent effects on interest calculations, shedding light on the considerations and potential drawbacks associated with this financial maneuver.

What is premature withdrawal

Premature Withdrawal is a term used to describe the process of withdrawing money from a fixed deposit account before its maturity date. This can be done in case of an emergency or if you need the money for some other purpose. However, banks and financial institutions may charge a penalty for premature withdrawal, which can reduce the interest rate earned on the deposit.

The penalty charges for premature withdrawal of fixed deposits can be levied in different ways. For instance, some banks may charge a percentage of the interest earned as a penalty, while others may charge a fixed amount.

It is important to read the terms and conditions of the fixed deposit scheme carefully before investing.

What is the premature withdrawal of a fixed deposit account?

Fixed deposits offer the flexibility of premature withdrawal, allowing you to close the account before its maturity date. Nevertheless, availing this option usually incurs a penalty fee imposed by the bank or financial institute. The purpose behind this penalty is to discourage frequent withdrawals and encourage a savings discipline. It's worth noting that some banks or financial institutes may permit FD withdrawal without imposing any penalty fees.

How premature withdrawal of FD affects interest rate

Let’s assume that you’ve invested a sum of Rs. 10 lakhs over a tenor of 48 months, with an interest rate of 8.05% This interest rate is set for 48 months. Say you want to withdraw the FD after 12 months. The interest will be calculated at the former rate, which was the interest rate on a one-year FD when you first opened the fixed deposit.

So, before you choose premature withdrawal, do the calculation and be prepared to receive lower returns. If not, try to fund emergencies using other modes of finance like personal loans, cash reserves, or the sale of an asset. This way, you can keep your FD intact until the lapse of the tenor.

How to calculate penalty on premature withdrawal of fixed deposit?

Depending on the lender you have chosen, you may have to pay a significant sum of money as a penalty. This could range from 0.50% to even up to 2% of the FD amount. So, before you prematurely close your FD, ensure that you are prepared to pay this penalty.

Choose a lender that makes premature withdrawal easy and has flexible terms. Consider opening a Fixed Deposit with Bajaj Finance, which charges a low premature withdrawal fee while offering an attractive rate of interest on FD.

Disadvantages of premature withdrawal

  1. Penalties: Premature withdrawal from investments can lead to financial penalties, like reduced interest rates or forfeited earnings, impacting your savings goals and overall returns.
  2. Interrupted growth: Taking out money early disrupts the compounding effect, a vital factor in wealth building. Longer investments generally mean more growth, but premature withdrawal limits this potential.

Losing interest if you withdraw and re-invest

In some cases, you may withdraw your FD to invest in another FD offering a higher interest rate. It could be a wise decision if you profit after paying the penalty charges. If not, keeping your FD intact makes more sense.

How you can avoid premature withdrawal while ensuring liquidity

You can look at various methods as below to avoid early liquidation of fixed deposits:

  1. Laddering FDs using multi-deposit facility
    You can use the multi-deposit facility with Bajaj Finance FD to split your investment amount into multiple FDs, each having a different maturity timeline and interest payout frequency. This will ensure you have a steady stream of FDs maturing in succession. Hence, whenever you need cash, you can utilize this money without going for a premature withdrawal.
  2. Non-cumulative FDs
    Try to keep some FDs in the non-cumulative mode to earn a fixed payout each month. You can use this surplus money to either pay recurring expenses or to tackle emergencies. Sometimes even a fixed income each month helps tremendously in creating a sum in use.
    You can set your interest payout frequency as monthly, quarterly, half-yearly, or annually with the Fixed Deposit interest Rate Calculator.
  3. Short-tenor FDs
    If you are unsure of the time duration you might need your money, go for short FDs starting 12 months with Bajaj Finance FD. Short tenor FDs will also help you safeguard your investment against inflation.
  4. Loan against FD
    Instead of breaking your FD, you can consider taking a loan against fixed deposits. This is a wise move that prevents you from depleting your finances while also ensuring enough liquidity to help you meet your emergency needs. In addition, this is a low-cost loan as you only must pay a marginal interest rate, over and above the interest you are earning.

You can use online tools such as My Account, your online fixed deposit account, set interest payment frequency, apply for a loan against FD, and manage multiple FDs online.

As you see, with thoughtful planning of your FD investments, you can avoid liquidating your fixed deposits before the maturity timeline. However, if you have to liquidate your fixed deposits, ensure that you’re aware of the various withdrawal terms set by your lender. These terms may change periodically, so make sure you’re aware of these beforehand.

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Frequently Asked Questions

What is the Digital FD offered by Bajaj Finance?

Bajaj Finance has launched a new FD type called "Bajaj Finance Digital FD" for a period of 42 months. Bajaj Finance is providing one of the highest interest rates of up to 8.85% p.a. for senior citizens and for the customers below the age of 60 they are providing up to 8.60% p.a. The Digital FD can be booked and managed only through the Bajaj Finserv website or app.

Is premature closure facility applicable for tax saver fixed deposit?

No, the premature closure facility is typically not applicable for tax saver fixed deposits, as they come with a lock-in period.

Can I partially withdraw FD before maturity?

Partial withdrawals from fixed deposits before maturity are generally not allowed; you typically need to break the entire FD.

Can I withdraw money from fixed deposit before maturity?

Yes, you can withdraw money from a fixed deposit before maturity, but it often involves paying a penalty.

How is premature FD withdrawal calculated?

Premature FD withdrawal is calculated based on the bank or NBFC’s penalty rules, which may involve a paying a penalty and reduction in the interest rate.

How do I withdraw money from my FD without breaking it?

To withdraw money from your FD without breaking it, consider taking a loan against the FD.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.