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Looking to prematurely withdraw FD? Here's how interest will be calculated

Looking to prematurely withdraw FD? Here's how interest will be calculated

Looking to prematurely withdraw FD? Here's how interest will be calculated
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By Anshul  Aug 22, 2020 6:00:08 PM IST (Updated)

Fixed deposits (FDs) are preferred by risk-averse investors as they are secure in nature and offer guaranteed returns.

Fixed deposits (FDs) are preferred by risk-averse investors as they are secure in nature and offer guaranteed returns. There are several tenures available for FDs, which ranges from 7 days to 10 years. FDs are offered by banks as well as non-banking financial companies (NBFCs).

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When it comes to liquidity, only FDs with premature withdrawal facility allow investors to break it before maturity. Premature withdrawal means investors can withdraw the amount, in case of cash crunch, and close the account before term ends.
However, FD rules vary from one lender to another.
For example, Shriram City Union Finance -- a non-banking finance company (NBFC) -- doesn’t allow closure of FD within three months of investment.
“In case closure is done after three months but before six months from the date of deposit, no interest is paid. In case, if the closure is done after six months from the date of deposit but before the date of maturity the interest payable is 2 percent lower than the interest rate applicable to a public deposit for the period for which the deposit has run," says Y S Chakravarti, MD & CEO, Shriram City Union Finance.
Also, liquidating deposit before the end of its term attracts certain penalty charges. The penalty charges usually range between 0.5 percent and 1 percent.
Currently, State Bank of India (SBI) charges a penalty up to 0.50 percent for premature withdrawal of an FD deposit up to Rs 5 lakh. HDFC Bank currently charges 1 percent for premature withdrawal.
The penalty is levied on the interest to be paid to the depositor.
“At premature withdrawal, investors will get a reduced interest rate. The effective interest would be booked rate or card rate (whichever is lower) minus the penal interest rate for withdrawing early,” explains Rachit Chawla, founder and CEO, Finway and Director- technology and finance, Risers Accelerator.
At time of withdrawal, FD rate is calculated for the period for which the deposit remained with the lender. Here the rate that was available during the opening of account is taken into consideration.
For example, Rahul opened an FD with a particular lender for 2 lakh with tenure of 2 years. While he was investing, the rate for 2-year FD was 6 percent and that for 1-year was 5.75 percent. After 1 year, he breaks his deposit to meet a cash crunch. Here, the rate payable will be the rate applicable for 1 -year FD at the time of opening the FD. The lender will calculate rate of 5.75 on principal amount which is Rs 2 lakh.
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