After 25 years, the time Usha had long looked forward to had arrived. Her daughter was finally getting married. As her daughter’s marriage date arrived, Usha, who had meticulously saved up over the years, decided to withdraw a partial sum from her Fixed Deposit (FD). Under normal circumstances, she would have waited for the term to end before using or re-investing the money. But this time, the situation was different. So many were the wedding expenses that she had to withdraw money mid-term. The bank’s representative informed her that, per the rules, a premature withdrawal of her FDs would cost ₹14,000 plus GST and processing fees.
Usha could use some of the FD money, but she never understood why the bank penalized her for withdrawing her money. If she had read this article, she wouldn’t have to wonder.
Premature FD withdrawal penalty: Why do we have it?
To understand the penalty for premature withdrawal of an FD, one needs to first comprehend how a bank works. A bank’s operating procedure is simple. It involves a borrower (someone who needs the money), an intermediary (the bank), and a lender (your deposits). As a mediator, the bank can arrange funds from several lenders like you on the promise of good interest rates. The bank does this to offer money to the borrowers. Banks earn from the difference between what it offers to lenders like you and borrowers who approach the bank for a loan. As a lender, if you approach the bank requesting it to prematurely withdraw an FD, the bank has to honor your request. However, it will now need to find another lender. For this, the bank needs time as well as funds.
Besides, they need to ensure that premature withdrawals are penalized so that it deters others from withdrawing unnecessarily. If withdrawing an FD was a simple and loss-free process, everyone would do it often, and the bank would have to shut down.
These are some of the reasons why several banks impose a pre-mature withdrawal fee.
What is the premature withdrawal of a fixed deposit penalty?
Put simply, a premature FD withdrawal penalty is the fee banks or financial institutions charge when an investor withdraws their fixed deposit prematurely. Here, prematurely means before the end of the agreed-upon tenure. Each deposit has a fixed tenure—ranging from a few weeks to many years. So any withdrawal before the end of the period—the maturity date—you had signed up for is considered premature.
As discussed above, banks usually charge a penalty because it disrupts their cash flow.
The penalty for premature withdrawal of fixed deposits varies across banks and financial institutions. It is generally a percentage of the interest earned on the deposit. The penalty can range from 0.5% to 1% of the interest. And in some cases, it can be as high as 2%.
FD premature withdrawal penalties of top banks
The premature withdrawal penalty for fixed deposits varies from bank to bank. And it depends on factors such as the tenure of the deposit, the deposit amount, and the terms and conditions of the bank. However, here are some estimates of the penalties applied by top Indian banks.
The percentage denotes the interest rate applicable to the deposit.
| Bank | Penalty |
| State Bank of India (SBI) | 0.5% to 1.5% |
| HDFC Bank | 1% to 1.5% |
| ICICI Bank | 0.5% to 1% |
| Axis Bank | 0.5% to 1.5% |
| Punjab National Bank (PNB) | 1% |
| Bank of Baroda (BOB) | 1% |
| Canara Bank | 1% |
| Union Bank of India | 1% |
| Indian Bank | 1% |
| Central Bank of India | 1% |
| IDBI Bank | 1% |
| Punjab & Sind Bank | 1% |
| UCO Bank | 1% |
| Bank of India (BOI) | 0.5% to 1% |
| IndusInd Bank | 0.5% to 1% |
| Kotak Mahindra Bank | 0.5% to 1% |
| Yes Bank | 0.5% to 1% |
| IDFC First Bank | 0.5% to 1% |
| RBL Bank | 0.5% to 1% |
| Federal Bank | 0.5% to 1% |
How to break an FD prematurely
To break a fixed deposit prematurely, you must visit the bank and fill out a form. After deducting the premature withdrawal penalty, the bank will then calculate the amount you are due to receive. The procedure can be done online or offline.
Online FD withdrawal
You may use internet banking or the bank’s smartphone application to complete withdrawal formalities.
Offline FD withdrawal
For offline withdrawal, you may contact the bank’s customer service and initiate a partial or even complete premature withdrawal of the FD.
Disadvantages of premature withdrawal of FDs
Premature withdrawal of FDs affects the bank as well as the deposit holder. Banks charge a penalty on breaking fixed deposits prematurely because it disrupts their cash flow. However, applying the penalty makes customers think twice before investing. From an investor’s point of view, the premature withdrawal penalty means a loss of money, which is naturally not welcome.
Some Indian banks do not charge a penalty for breaking fixed deposits prematurely. However, these banks may have certain conditions, such as a minimum lock-in period or a maximum limit on the amount that can be withdrawn prematurely without penalty. Therefore, it is important to read the terms and conditions carefully before investing in a fixed deposit and choose a bank that meets your liquidity requirements.
Conclusion
The penalty for premature withdrawal of fixed deposits can significantly impact the return on investment. Therefore, it is important to carefully evaluate the investment tenure and choose a timeline per your liquidity requirements. Always ask what the premature withdrawal penalty is while choosing a bank or financial institution for fixed deposits.
FAQs
What is premature withdrawal of a fixed deposit?
Premature withdrawal of a fixed deposit refers to withdrawing the funds from a fixed deposit account before its maturity date. This may result in penalties or reduced interest rates, varying by the bank’s terms and conditions.
Can I withdraw money from a fixed deposit before maturity?
Yes, you can withdraw money from a fixed deposit before its maturity, but it usually comes with penalties or reduced interest rates. The exact terms and conditions depend on the bank or financial institution where you hold the fixed deposit. It’s best to check with your bank about their specific policies regarding premature withdrawal.
What is the penalty for premature withdrawal of HDFC fixed deposit?
The penalty for premature withdrawal of an HDFC fixed deposit may vary depending on the deposit’s term and the bank’s current policies. It’s best to contact HDFC customer support or visit their official website for up-to-date information on their fixed deposit withdrawal penalties.
Can I withdraw my fixed deposit before maturity online?
The ability to withdraw a fixed deposit online before maturity depends on the bank’s policies. Some banks offer this service through their website or app, subject to applicable penalties. Verify with your bank.
Do all banks charge the same penalty for premature withdrawal of a fixed deposit?
No, different banks have varying policies regarding premature withdrawal penalties for fixed deposits. The penalty amount or percentage may differ between banks, so it’s essential to check with your specific bank for their terms and conditions.
