A fixed deposit account is one of the safest investment options in the country as it is comparatively risk-free and also guarantees returns. It is an investment where a customer deposits a certain sum of money in an account, for a given tenure and earns interest on it.
In an FD account, the amount which is deposited is locked without any scope of withdrawal when needed. So if the investor does need the money on an immediate basis, he or she can opt for premature withdrawal or breaking of the fixed deposit.
Withdrawal of the money in the fixed deposit account before maturity is termed as premature withdrawal. This is done if the investor needs money on an urgent basis. An investor can also withdraw the money in the fixed deposit before its maturity if there is an investment option which is better than the Fixed Deposit.
The fixed deposit can be broken prematurely through net banking if the investor is not able to visit the bank.
If done in the branch, the fixed deposit receipt needs to be submitted to the bank which is signed by all the account holders. In case, the receipt is misplaced, a fixed deposit liquidation form needs to be filled by the account holder. Once filled and submitted, the bank processes the request and the money is transferred to the investor's personal account.
Most banks charge for premature withdrawal of the fixed deposit. This is usually 0.5% - 1.00% of the interest rate.
However, some banks do not charge any penalty in case of an emergency or if you wish to invest the same amount in another investment option provided by the bank.
Apart from this, when an investor closes an account prematurely, the rate of interest is lowered when compared to the fixed interest initially given. For example, let us say that an investor has deposited a certain amount on an FD which earns an interest of 8% annum for 3 years. For the first year, interest earned was 6% per annum. If withdrawn prematurely after one year, the interest paid to the investor will be 6% per annum and not 8% per annum.
Hence, unless it is absolutely necessary, premature withdrawal of fixed deposit results in a great loss for the investor.
For some banks, deposits cannot be withdrawn before a minimum of 6 months since the day, the account was opened and if done so, no interest is paid.
|Less than Rs.5 crore||Rs.5 crore and above|
|Less than 1 year||0.50%||0.50%|
|1 year and above but less than 5 years||1%||1%|
|5 years and above||1.50%||1.50%|
Banks are allowed to charge their own penalty fee in the case of premature withdrawal of FD, as per the Reserve Bank of India.
However, most banks charge from 0.5% to 1% of the interest rate and this has to be communicated to the investor before the FD account is opened.
Some major banks such as HDFC Bank charge 1% for premature withdrawal. On the other hand, ICICI Bank charges 0.5% to 1% and State Bank of India charges 0% to 0.50% of the interest rate.
Fixed Deposit (FD) is considered to be one of the most popular investment tools. You can invest in a fixed deposit scheme for up to 10 years and earn attractive interest which would help you take care of your long-term financial requirements.
However, due to immediate cash crunch, there might be times when you may have to prematurely withdraw from your fixed deposit account, which would attract a penalty. Hence, in order to avoid that, there are certain ways through which you can avoid penalty for premature withdrawal of FD. We will have a look at those methods given below.
FD laddering is a process where you apply for various fixed deposit schemes with different maturity periods. You can take a lumpsum amount and divide them into smaller investments by opening multiple fixed deposit accounts.
For example, if you have a lumpsum amount of Rs.5 lakh, you can invest it in five different smaller FDs with maturity periods ranging between one year and five years. In this way you will not only long-term fixed deposit accounts, but also short-term accounts which will ensure you have enough liquidity.
The laddering process helps as you may not be required to make any premature withdrawals and also meet your immediate financial requirements.
However, if you need to premature withdraw money, it will be only to the extent of the amount you will need. For example, if you need an amount of say Rs.2 lakh, you can prematurely withdraw Rs.1 lakh each from two of your FD account. While you may have to pay a penalty for those two accounts, the remaining ones will continue to fetch you interest on your deposits. You can then choose to reinvest on maturity so that you can increase your cash flow.
Instead of prematurely withdrawing from your FD account, you can avail a loan against your fixed deposit amount. Most lenders provide this facility and charge interest 1%-2% above the interest paid on the deposit. The rate of interest charged will differ from bank to bank and it is recommended you consult your bank in case of any queries before availing this facility. Most lenders allow their customers to avail up to 90% of their deposit amount.
This facility allows the lender to credit any sum in excess of the amount you had stipulated from your savings account to a sweep-in account.
On opening a sweep-in account, the tenure may range between one year and five years, and you are likely to earn a higher interest on the amount deposited to your account.
However, in order to be eligible for this facility, you might be required to open an FD account with a minimum amount of Rs.25,000 in your savings account. This facility offers better corpus and ensures that your immediate cash requirements are met without you having to touch your regular investments. You can withdraw as per your convenience without having to pay any penalty whatsoever.
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