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.