Fixed deposits (FDs) remain one of the most trusted investment tools for Indians seeking safety and steady returns. This is evidenced by the fact that FD deposits in banks have been outpacing savings bank deposit growth for the last two financial years, as per the latest Reserve Bank of India data. As of March 2024, the term deposits in banks stood at a staggering ₹116 lakh crores!

Fixed deposits provide a host of benefits, including guaranteed returns, no market risks, ease of opening and managing, and more. However, before you invest in an FD, you should know about the penalties involved with certain actions. For instance, if you prematurely withdraw your FDs due to an unexpected financial need, it may attract penalties, which can reduce your overall returns. While the fixed deposit penalties are only applicable in specific cases, it is advisable to know about them in detail.

What are Fixed Deposit Penalties?

• A fixed deposit premature withdrawal penalty is a fee that a bank imposes when an investor breaks an FD before its maturity. Some banks may adjust the interest amount or charge a fee as a penalty.

• Although FDs are meant to keep funds locked in for a fixed period, most banks allow the customer to make an early withdrawal. Customers can submit an application for premature withdrawal of fixed deposit and get access to their deposit funds.

• These penalties help the bank recover losses caused by the customer breaking the deposit before the end of the fixed term. Banks have varying rules regarding penalties. However, penalties usually mean a fee, or a percentage of the interest earned.

• For instance, let’s assume you withdraw an FD meant for three years after just one year. Here, the bank may have to consider the one-year FD interest rate instead of the original three-year rate. In addition, banks may also deduct a penalty charge.

• Some FDs, called non-callable FDs, do not come with premature withdrawal facilities. Hence, it is advisable to be fully informed of these terms when opening an FD.

Understanding the Reasons for Premature Withdrawals

Despite the fixed deposit breaking charges, people still tend to opt for premature withdrawals. Understanding why this occurs can help you choose between breaking your FD or looking for alternative options.

1. Emergency Expenses

Situations like hefty medical bills, job loss, or urgent personal needs may force someone to withdraw their FD early for quick access to funds.

2. Better Investment Options

Investors might bear the fixed deposit breaking charges to put their money into investments with higher returns, such as stocks, mutual funds, or other high-yield schemes.

3. Low Interest Rates

If an FD offers a lower interest rate, investors might withdraw it and reinvest in a newer FD with better rates.

4. Business Cash Needs

Business owners might break an FD to address urgent cash flow issues or make the most of a valuable opportunity.

How Do Fixed Deposit Premature Withdrawal Penalties Work?

When you withdraw an FD prematurely, the bank recalculates the interest based on the rate for the actual period the funds were in the account. This rate will be lower than the originally agreed rate.

For example, let’s assume you have booked a 2-year FD for which the interest rate is 7.75%. However, for an urgent medical reason, you have to prematurely withdraw the FD after 6 months. Now, the rate of interest for a 6-month FD is 5%. Hence, you will only earn a 5% interest rate on your FD amount when you withdraw it.

In addition, banks may also impose a fixed deposit premature withdrawal penalty. This is usually a percentage of the interest earned. A typical penalty might range between 0.5% and 1%.

So, if the penalty is 1% in the above scenario, you might only receive 4% interest on your FD amount. Thus, the combined impact of these two penalties can reduce your returns by a substantial level.

How to Avoid Fixed Deposit Penalties – and Still Access Funds

Premature withdrawal penalties can reduce your interest earnings, but there are some smart ways to access funds while avoiding penalty losses:

1. Partial Withdrawals

You can also make a partial withdrawal, i.e., withdraw only the amount you need instead of breaking the entire FD. You will come across this option when filling out the application for premature withdrawal of your fixed deposit. A partial withdrawal ensures that the remaining deposit keeps earning interest.

2. Sweep-in Facility

You can opt for a savings account that comes with a sweep-in facility, where excess funds from your account are transferred into an FD and where they earn interest at higher rates. When needed, you can withdraw the funds from the sweep-in FD and avoid fixed deposit premature withdrawals.

3. Loan Against FD

Instead of withdrawing your FD, you can take a loan against it. This allows you access to liquid cash without losing your FD's earnings.

4. Spread Your Investments

You can also divide your funds into multiple FDs with different maturity dates. This way, some FDs mature sooner, and you get easy access to funds during emergencies without breaking other FDs. To plan out multiple FDs with their varying interest rates and tenures, you can use tools like the FD calculator and get estimates of the returns.

5. Keep an Emergency Fund

Before investing in an FD, set aside a separate emergency fund to cover unexpected expenses. This helps you avoid a fixed deposit premature withdrawal.

For flexible and customer-friendly Fixed Deposit options, consider IndusInd Bank. Its feature-rich FD offerings ensure you have a smooth savings-cum-investment journey. With IndusInd Bank, you enjoy benefits like:

- Partial Withdrawal Options: Withdraw only what you need without affecting the rest of your investment.

- Competitive Interest Rates: Attractive rates ensure you earn maximum returns.

- Multiple Interest Payout Options: Receive the interest earned on your FD on a monthly, quarterly, half-yearly, or yearly basis.

- Hassle-free Instant Booking: Open an FD account online in minutes, even if you are not an existing IndusInd Bank customer.

Conclusion

Fixed deposits are an ideal and safe financial instrument for the steady growth of your funds, but premature withdrawals can erode your earnings due to penalties. By understanding how fixed deposit premature withdrawal penalty works and how you can avoid it, you can make better and more informed financial decisions.

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