Need Funds Urgently? Here’s How FD Premature Withdrawal Impacts Your Investment

Fixed Deposits have long been one of the safest investment options, offering stable income, guaranteed returns and low risks. They are an ideal choice for individuals who are looking to grow their savings over a fixed tenure. While withdrawing funds prematurely can provide immediate funds, it often comes with lower interest rates and penalties. 

In this blog, we will discuss the important aspects of early withdrawal, including the impact of FD withdrawal, drawbacks, and strategies to avoid penalties.

Understanding FD Premature Withdrawal

Fixed Deposits (FDs) allow depositors to deposit an amount at a fixed rate for a fixed tenure. However, a depositor may need to withdraw their savings before the maturity date. They will need to break the FD to do this. This facility allows the depositor to close the FD before the date of maturity, helping them address their urgent financial needs. 

Although some banks offer early withdrawal with no premature withdrawal penalties, most banks levy a fixed deposit premature withdrawal penalty ranging between 0.5% and 1%. Therefore, it is important to be aware of the bank’s policies to avoid any unintended penalties. 

Impact of Premature Withdrawal of Fixed Deposit

Some primary FD withdrawal impacts are: 

1. If you withdraw your FD amount prematurely, you need to pay a penalty. This depends on bank to bank but usually ranges between 0.5% and 1% of the pre-decided interest rate. Some banks may charge a higher penalty, while others may charge none.
2. As a result of this penalty, you will not receive the entire promised amount with the set interest rate and tenure. Additionally, it will lead to a reduced interest rate. For instance, if you had a fixed deposit for 5 years but withdrew it after 3 years, you will only be able to receive the 3-year FD rate set at the time of opening the FD account. 
3. Although the tax liability remains the same, your total earnings may decrease due to lower interest rates and penalty charges. Therefore, you should estimate the costs involved before making any decision on withdrawal. 
4. Premature withdrawals can impact your financial growth by interrupting the flow of stable returns. Disrupting your income flow can also affect your financial plans, especially your long-term plans.
5. Premature withdrawals also have an impact on the compounding of interest. Fixed deposits are designed in such a way that their interest is compounded monthly, quarterly, half-yearly or yearly. Early withdrawal potentially disrupts this process, leading to a loss in interest earnings compared to the return expected at maturity. 

Minimise the Impact of Premature Withdrawal

You can minimise the FD withdrawal impact by considering one of these options: 

1. You can consider explaining your financial situation to the bank officials and providing the necessary documentation to emphasise your financial urgency. This will make your withdrawal completely hassle-free.
2. Certain banks may provide the facility of penalty-free withdrawals for family deaths or medical emergencies. Therefore, it is important to review the terms and conditions of your FD account carefully so as not to miss out on this facility. 
3. You can contact your bank and consider the option of converting your present FD account into a scheme that offers lower interest rates but offers the facility of penalty-free withdrawals. This can help you earn interest while being able to withdraw a specific portion of the amount. 
4. Stay invested over the minimum period, which allows withdrawal without any penalty. Some fixed deposits offer a specific duration between 7 and 30 days, after which a lower penalty is applicable. 
5. If you have more than one FD account, it is better to compare the applicable penalties for premature withdrawal from each of them. You can withdraw from the FD with the lowest penalty charge, which will help you minimise the impact on returns. 

Strategies to Avoid Penalty on FD Premature Withdrawal 

Here are the strategies that will help you avoid penalty on FD premature withdrawal: 

1. Sweep-in Facility: The sweep-in facility allows banks to credit any amount over the sum that you have specified from your savings account to a sweep-in FD account. The tenure of a sweep-in account usually ranges between 1 and 5 years, and it ensures higher returns than your savings account. It is important to remember that you need to open an FD account with a minimum of ₹25,000 to be eligible. 
2. Loan Against FD: You can also take a loan against your fixed deposit amount instead of prematurely withdrawing from your FD. The interest rates will depend on the banks. Additionally, most banks allow depositors to withdraw up to 90% of the initial deposit amount.  
3. FD Laddering: This is a process where you can apply for different FD schemes with varying maturity periods. This way, you can divide a lump sum amount into small investment amounts by creating multiple FD accounts. FD laddering provides you with instant liquidity and helps you address your urgent financial needs. 

For instance, if you require ₹5 lakhs, you can withdraw ₹2.5 lakhs from two accounts. While you still may have to pay a penalty for withdrawing from these accounts, the rest of your funds will continue to grow and earn interest. 

Final Words:
While early withdrawals can be a potential option for immediate liquidity, you must carefully evaluate the decision due to FD withdrawal impact on interest, taxes, and penalties. You can consider alternative options to avoid penalties and go for options like loan against FD, laddering and more. Plan ahead to minimise your withdrawal penalty when you need to withdraw funds.

Frequently Asked Questions