Quick Guide on Premature FD Withdrawal: Process, Penalties and More

If you plan to withdraw your FD before it matures, whether partially or completely, this process involves paperwork and penalties. Before you go about the process of making a premature withdrawal of a fixed deposit, you must know what to expect. 

When you have an unexpected financial or medical emergency, you can liquidate your FD in just a few steps. Read on to know more about the process. 

Understanding Premature Withdrawal

After you have opted for a term deposit, commonly known as a fixed deposit, your money is invested for a fixed term. You get an interest based on how much you have invested and for how long. When you wish to proceed with a premature withdrawal of a fixed deposit, the timeline is reduced, which leads to an interest penalty. Some financial institutions may allow you to do this without any penalty, but this is rare. 

Premature FD Closure Charges

The fixed deposit penalty will vary based on the bank or NBFC where you made the deposit.  Before submitting the application for premature withdrawal of a fixed deposit, find out about the interest rate penalty. Here’s an overview of how much you may be paying:

• Most banks charge a penalty ranging between 0.5% and 1.00% of the interest rate
• The initially promised interest rate will also reduce based on the actual tenure 
• Some banks may forgo the penalty for prematurely withdrawing your FD

FD Premature Withdrawal Penalty

As FD promises to preserve your capital, your principal will be untouched. The penalty will be reflected in the FD interest earned over your investment period. So, assume you book an FD at ₹15 lakhs for 36 months at 7% p.a. 

After 12 months, you wish to withdraw the funds, but the issuer charges a 0.50% penalty. In that case, your final interest will be calculated for one year at 6.50%. As such, here are your returns calculated before and after.  

Parameters	Before Premature Withdrawal	After Premature Withdrawal
Tenure	36 months	12 months
Interest	7%	6.5%
Calculated Interest	₹34,716	₹9,990
Total Earnings	₹1,84,716	₹1,59,990

Avoiding Penalties on Withdrawing Prematurely

There are three options to avoid penalties for your premature withdrawal of a fixed deposit. 

• Option 1: Invest for a shorter period, like 7 days or 3 months
• Option 2: Go for an issuer who doesn’t have penalties on FD premature withdrawal
• Option 3: Choose flexi fixed deposit options

Advantages and Disadvantages of FD Premature Withdrawal

To make the right decision about your investment, check the table below:

Pros of FD Premature Withdrawal	Cons of FD Premature Withdrawal
1. You can get immediate access to funds  2. You can experience financial flexibility 3.You can pay off any debt with the FD proceeds	1. Your promised interest will be reduced  2. Your long-term goals may be impacted 3. You may have to bear interest penalties

If you want to withdraw your FD before the lock-in period, keep the penalty in mind. The best way to maintain your investment is to create an emergency fund that can help you address urgent needs with ease. 

FAQs on FD Premature Withdrawal

Are there tax implications for early withdrawal of fixed deposits?

The application for premature withdrawal of fixed deposit does not affect the tax you need to pay. The tax is based on your interest earnings and is related to your tax slab. TDS is also applicable based on whether your interest earnings cross the threshold of ₹40,000 or ₹50,000 based on whether you are a regular or senior investor.

Can I avoid penalties for premature withdrawal of fixed deposits?

The only way to avoid penalties on FD premature withdrawals is when you choose a financial institution that doesn’t charge a fee for this facility. Otherwise, you can try to ladder FDs or choose a Flexi FD for more liquidity. 

Can I reinvest my prematurely withdrawn fixed deposit amount in a new FD?

When you choose to proceed with a premature withdrawal of the fixed deposit amount, you can use the funds as you wish. You can also invest in a new FD with higher interest rates.