Understanding Premature Withdrawals from Fixed Deposits Pros and Cons

Posted on Friday, February 23rd, 2024 | By IndusInd Bank

When you park your money in an interest-bearing fixed deposit (FD)for a specific period, you aim to grow your savings and steadily build a corpus. FDs come in various tenures ranging from 7 days to 10 years and you can lock in your FD for a specific period of your choosing. But suppose you are buying a house and wish to fund part of it from your savings. You might decide to break some fixed deposits to get the necessary funds. This is called the premature withdrawal of a fixed deposit and has certain consequences.  

What is Premature Withdrawal of a Fixed Deposit? 

A fixed deposit offers an investor a fixed rate of interest on a lump sum amount deposited with a bank for a specific period and can be determined by using a fixed deposit return calculator. The interest is either paid after certain intervals or is re-invested. At the end of the maturity period, the investor gets the principal lump sum amount along with interest. Premature fixed deposit withdrawal means the investor withdraws the fixed deposit before the maturity date.  

Also Read: 5 Rules to know about if you are planning to invest in Fixed Deposits 

Are There Penalty Charges for Premature Withdrawal of FDS 

Premature withdrawal of fixed deposit typically carries a penalty. Different banks impose different penalty charges, and it typically involves a reduction in interest rate. The penalty can range from 0.5% to 1%.  

Premature Withdrawal of FDs: Penalty Calculation 

Assume an investor has opened a fixed deposit of Rs 10 lakhs with a bank for three years. Due to unavoidable circumstances, he wishes to withdraw this fixed deposit after 5 months. If the rate of interest is 5% for 5 months and the penalty charge is 1%, then the investor will now get 4% for 5 months. Hence, he/she will earn an interest of Rs 16,667 (4%*(5/12) *10,00,000) after the bank’s penalty of Rs 4,167.  

Disadvantages of Premature Withdrawal 

Premature withdrawal of fixed deposit has certain disadvantages as follows: 

• Loss of Interest: When you prematurely withdraw a fixed deposit, you lose out on the full interest you would have earned had you held on till maturity.  
• Penalty: Fixed deposit withdrawal before maturity carries a penalty as explained above that can range between 0.5% and 1% depending upon the bank’s policy.  
• Impact on Net Worth: Fixed deposits form a part of your total assets and net worth. So, if you have prematurely withdrawn a fixed deposit to meet certain expenses rather than create another asset, then your overall net worth reduces.  

Also read: How Does the FD Minimum Period Differ across Various FD Types? 

Premature Withdrawal of FD: Some Alternatives 

1. Credit Cards: You can consider using credit cards to pay for your purchases rather than prematurely withdrawing a fixed deposit. When you use a credit card, the issuing bank pays on your behalf, and then you can repay the bank later.  

2. Liquidating Other Investments: You could consider liquidating some investments from your portfolio of stocks and mutual funds to meet your expenses and still earn profits. 

3. Using Contingency Fund: If you have created a contingency fund to meet unexpected expenses, you could consider dipping into this fund rather than prematurely withdrawing a fixed deposit.  

4. Loan against Fixed Deposit: Rather than prematurely withdrawing a fixed deposit, you can consider taking a loan against this fixed deposit. Many banks, including IndusInd Bank, allow you to borrow up to 90%-95% of the fixed deposit amount. 

How to Close FD Prematurely 

You can close a fixed deposit online through net banking by logging into your account. Alternatively, you can visit the bank branch and complete all formalities required for closing the deposit, which includes filling out a form and submitting certain documents.  

Conclusion  

If you have opened a fixed deposit, it is better to hold it till its maturity date to earn the full interest determined by the fixed deposit return calculator. However, you have the option to prematurely withdraw fixed deposits too if required, provided you are willing to accept the loss of interest and penalty charges. 

Disclaimer:  The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.