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Fixed Deposit Premature Withdrawal and the Impact on Interest Calculation

RBL Bank Dec 29, 2022

Fixed earnings and relatively low risk are two key factors that contribute to the Fixed Deposit's (FD) prominence in many people's investment portfolios. Liquidity is another perk of the FD. Early redemption of regularly redeemable Fixed Deposits is usually permitted by banks, though often with a fee. Having money in hand in need of emergency finances makes this aspect of the FD helpful. This post will share insights related to the premature withdrawal of Fixed Deposits.

To begin with, there are two things you should know before choosing to redeem your FD assets prematurely.

  • How does the bank compute interest on the FD to determine the amount paid?

  • How will the amount you pay change if a penalty is levied for early encashment?

Withdrawal Process

We can withdraw the Fixed Deposit online or offline.

You can follow the below steps for premature withdrawal of Fixed Deposit online.

Online FD Withdrawal

  • Visit your respective bank website.

  • Login into your net banking with proper credentials.

  • Select the 'Fixed Deposit' option under the account tab.

  • Click on the premature withdrawal option.

  • Your premature withdrawal details will appear on the screen.

  • Select the desired account to transfer the funds.

  • Lastly, click on 'Submit' to complete the withdrawal process.

Offline FD Withdrawal

You can follow the below steps for premature withdrawal of Fixed Deposit offline.

  • You need to visit the nearest bank branch where you opened the FD account.

  • Now, submit the duly filled withdrawal form, a deposit certificate, ID proof, and photographs.

  • You will receive the funds in your savings bank account post-document verification.

How is Interest Calculated on Premature Withdrawal of Fixed Deposit?

Upon early withdrawal from a Fixed Deposit, the interest rate will be lower than the booked rate (the interest rate when the FD account was created) or the card rate for the period the Fixed Deposit was still with the bank.

#Case1: If The FD Booked Rate Is Higher Than The Card Rate

Let's say you have opened an FD account in a bank for INR 1 Lakh with a one-year term. The current interest rate on a one-year FD was 7% at the time of investment. Then, after six months, you terminate the FD to address a pressing financial need. Back then, a six-month FD had a 6.25% interest rate. Because the six-month rate (card rate) was lower than the one-year rate (booked rate) at the time the FD was formed, the interest rate that will be paid to you will be the rate that was applicable for a six-month FD following the time the FD was opened.

So, on the sum of INR 1 lakh, the bank will compute interest at a rate of 6.25% (instead of 7%; a reduction of 0.75%), and it will pay you accordingly.

Principal Amount 1 lakh
Interest at the time of FD Booking for a year 7% per annum
Maturity amount after one year INR 1,07,186
Interest Rate on 6-month FD at time of Booking 6.25%
Amount Due at Premature Withdrawal INR 1,03,340

 

#Case2: If Booked at a Rate Lower Than the Card Rate

In the event of an early withdrawal, the reimbursement amount will be determined using the booked interest rate.

Assume you opened an FD account with a one-year term and a 6.25% annual interest rate. After 90 days, you choose to withdraw early. The prevailing interest rate for an FD with a duration of 90 days was 6.50%, according to the card rate provided when the FD account was opened. In this scenario, the bank will determine the 6.25% interest that must be paid on the early withdrawal of the FD.

In both cases, the bank will assess a penalty, if necessary, after the effective interest rate is determined in the event of an early FD withdrawal.

Penalty on premature withdrawal of FD

Banks often charge a penalty on closing or prematurely withdrawing Fixed Deposits before the booked tenure is completed. The penalty interest rate can go up to 1% depending on the bank, the original tenure of the FD, and the term for which the Fixed Deposit remained with the bank. The premature withdrawal penalty is subtracted from the Fixed Deposit's effective interest rate. Using the FD Premature Withdrawal Penalty Calculator, you can calculate the FD amount for early withdrawal of funds before maturity.

Take a look at this:

Principal Amount 1 lakh
Interest at the time of FD Booking for a year 7% per annum
Maturity amount after one year INR 1,07,186
Interest Rate on 6-month FD at time of Booking 6.25%
Penalty charges due to Premature Withdrawal 0.50%
Effective Interest Rate Payable 5.75%
Amount received INR 1,03,213

 

Keep in mind that there may be instances where you may not be penalised for premature FD withdrawals. Some banks exempt certain customer groups' Fixed Deposits from the penalty interest rate for a set period. Conversely, if the FD is held with the bank for a shorter time, certain banks will not pay interest.

What should you do?

You may incur fees if you prematurely withdraw from your FD or if the effective interest rate is reduced. Therefore, when opting for an FD, examine the bank's terms and conditions for early withdrawal. Use the FD premature withdrawal penalty calculator to find out how much you have earned till today on your existing Fixed Deposits.

Calculate the consequences before deciding whether or not to break your FD. Determine how much you will lose due to the penalty (if any), the reduced effective interest rate (if any), and the early withdrawal of the FD.

Disclaimer: Articles published on the website are merely indicative and suggestive in nature and do not amount to solicitation. The contents do not guarantee the desired returns and/or results. Reader is advised to exercise discretion and consult independent advisors for achieving desired result. Visitors to this blog/ website w.r.t products & services offered by RBL Bank Limited herein, shall ensure that the comments / feedback posted shall be restricted to the contents published herein and shall not contain such language that may be un-parliamentary or against any religion, caste, section of society, political view etc. While our endeavor is to publish the comments that are submitted, however, all comments/feedback shall be subject to internal review by RBL Bank Limited. We do not guarantee that the comments that are submitted will be published.

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