Fixed deposits, with premature withdrawal facility, allow the depositor to close the FD before the date of maturity.
Fixed deposits (FDs), also known as term deposits (TDs), are fixed-income instruments that yield fixed returns over a pre-defined period of lock-in. FDs can be broadly categorized into two types – with premature withdrawal and without premature withdrawal facility.
Fixed deposits, with premature withdrawal facility, allow the depositor to close the FD before the date of maturity. However, liquidating a fixed deposit before the end of its term attracts certain penalty charges.
What are the penalty charges?
The penalty charges usually range between 0.5 percent and 1 percent, according to Paisabazaar -- a leading online marketplace for lending products.
Some banks also offer a premature withdrawal facility with zero penalty charges.
If the FD is prematurely closed, before completing 7 days from the date of the booking, the bank is however not liable to pay any interest, say experts.
"For some banks, deposits cannot be withdrawn before a minimum of 6 months since the day, the account was opened and if done so, no interest is paid," they add.
SBI currently charges a penalty up to 1 percent for premature withdrawal of an FD deposit up to Rs 1 crore. For premature withdrawal from SBI fixed deposits up to Rs 5 lakh, customers are required to pay a penalty of 0.50 percent across all maturities.
For premature withdrawal from SBI fixed deposits above Rs 5 lakh but below Rs 1 crore, the bank has fixed the penalty at 1 percent for all tenors.
HDFC Bank currently charges 1 percent for premature withdrawal. On the other hand, ICICI Bank charges 0.5 percent to 1 percent.
How are the penalty charges levied?
A penalty is levied on the interest to be paid to the depositor.
"If a bank charges 1 percent penalty on premature withdrawals, so the calculation of the interest on premature withdrawal of the FD will be done in the following manner- suppose a customer has FD of Rs 1 lakh and is earning interest at 8 percent. He withdraws the FD after completing 1 year. In one year, he has earned interest at 8 percent. But now, the bank will recalculate the interest at revised FD rates, i.e. 8 percent – minus 1 percent. The new rate will be 7 percent and interest will be paid at this rate instead of the previous 8 percent," according to Paisabazaar.
How advisable it is to withdraw FD before maturity?
Experts advise against withdrawing FDs before maturity unless there is a deep cash crunch and the customer is left with no other option.
"Premature withdrawal of fixed deposit results in a great loss for the investor," according to BankBazaar- an online investment platform.