What Does Premature Withdrawal Mean in FD 

Fixed Deposits (FDs) remain popular among Indian households, primarily due to their safety, simplicity, and predictable returns. While FDs assure returns at the end of the tenure, there may be unexpected situations where you need to access the funds before maturity. This article explains everything about premature withdrawals of FDs so that you can make an informed decision during financial emergencies. 

 Premature withdrawal meaning explained 

When you open an FD, you lock your money for a fixed period, ranging from a few days to several years, in exchange for a predetermined rate of interest. Any withdrawal you make from your FD account before the maturity date is called a premature withdrawal. 

For instance, if you book an FD of ₹1 lakh with a bank for a tenure of 10 years, any amount withdrawn before the completion of 10 years will be treated as a premature withdrawal. 

Banks and Non-Banking Financial Companies (NBFCs) generally allow premature withdrawals, but these are subject to specific terms and conditions, including reduced interest rates and applicable penalties. 

Reasons for FD premature withdrawal 

While it is ideal to stay invested for the entire tenure, certain situations may put you under financial pressure. Common reasons for premature withdrawal include: 

1. Medical emergencies: Health emergencies are not just emotionally taxing but also financially draining. In such cases, withdrawing an FD may be preferable to taking on high-cost debt. 
2. Job loss: Unexpected loss of employment can strain household finances. While an FD may not replace regular income, it can provide temporary financial support and allow you to focus fully on getting your professional life back on track.
3. Unexpected travel: Emergency travel, both domestic and international, often requires immediate funds. An FD can help meet such needs without disturbing your monthly cash flow. 
4. Better investment opportunities: The investment world is dynamic. Attractive opportunities may arise suddenly. In some cases, you may choose to withdraw your FD and invest funds elsewhere for potentially higher returns. 
5. Debt repayment: At times, the overall cost of closing the FD early may be lower than the total interest burden on outstanding debt. Premature withdrawal becomes a financially sensible choice in such cases. 

Penalties and charges for premature withdrawal 

Banks and NBFCs usually levy a penalty for premature withdrawal to discourage customers from closing the account early. Unplanned withdrawals not only disrupt the entity’s asset and liability management but also deprive investors of long-term compounding benefits.

The penalty levied is generally in the form of a reduction in the applicable interest rate at the time of withdrawal. 

Example:

• FD amount: ₹1 lakh 
• Original tenure: 1 year 
• Interest rate for 1-year FD: 7%
• Premature withdrawal: On completion of 90 days  
• Interest rate for 90-day FD: 5% 
• Penalty: 1% 

Had your FD completed one full year, it would have earned ₹7,000 in interest. However, due to premature withdrawal, the applicable interest rate becomes 4% (5% for 90 days minus a 1% penalty). 

As a result, the interest earned drops to ₹986. In effect, you lose out on over ₹6,000 of potential interest compared to your original plan, and your actual earnings for the period are reduced by a 1% penalty charge.

FD premature withdrawal procedure 

You can withdraw your FD offline or online, depending on your convenience: 

Offline: Visit the nearest bank or NBFC branch, submit a premature withdrawal request form, and complete the required verification.  

Online: Use your provider’s internet or mobile banking facility, navigate to the section on deposits, choose your FD and close it by selecting options such as ‘premature withdrawal’ or ‘close FD’. 

The principal amount, along with the applicable interest (calculated after penalty deduction) will be credited to your linked savings account. 

Alternatives to premature withdrawal 

Before breaking an FD, you may consider these alternatives: 

1. Loan against FD: Most banks allow you to borrow up to 75% to 90% of the FD value. The loan interest rate is typically 1% to 2% higher than the FD interest rate. Compare costs carefully to choose the best option for you.  
2. Overdraft facility: This facility lets you withdraw beyond your savings account balance up to a sanctioned limit. You pay interest only on the amount you use and not the entire limit. 
3. Partial withdrawal: Some providers allow you to withdraw your FD partially without breaking it. You can continue to earn interest on the remaining balance. However, this facility is not available for all FD types. For instance, you cannot make partial withdrawals from a 5-year tax-saving FD.
4. Emergency funds: Experts recommend maintaining an emergency fund covering at least three to six months of living expenses. Using this fund can help you avoid breaking long-term FDs that benefit from compounding.

Impact of premature withdrawal on returns 

As seen in the example above, premature withdrawal of an FD results in:

• Lower interest rates: You earn interest at the rate applicable to the actual tenure, which is usually lower than the original rate. 
• Penalty deduction: An additional penalty further reduces returns. 

For long-term FDs, you lose the benefit of compounding. This means missing out on returns generated on accumulated returns. Additionally, there is reinvestment risk, as you may not find alternative investments offering similar or higher returns. 

Conclusion 

The premature withdrawal facility offers flexibility during unforeseen financial situations. However, it comes at a cost in the form of reduced rates, penalties, and loss of compounding benefits. Before opting for premature withdrawal, it is wise to explore alternatives such as a loan against FD, an overdraft facility, partial withdrawal, or using emergency savings.