Fixed Deposits (FD), are a popular investment choice among Indians and is always subject to renewal and withdrawal. This applies to all types of term deposits including those in banks and those in Non-Banking Financial Companies (NBFC). Let’s say you open an FD account for Rs.3 lakh for 10 years at the rate of 10%. After the completion of 10 years, the term deposit will have to be renewed if you want to continue to hold to it. Otherwise, it has to be withdrawn. In case you forget to renew it, it will be auto renewed for the same tenure if you have given maturity instructions. Renewal happens at the present interest rate that is offered on the term deposit.
It is very important to keep track of your term deposits, because if you completely forget to renew it, the maturity amount will be difficult to claim later or it may be paid to the nominee. Auto-renewal may prove disadvantageous if the bank has reduced its interest rates. On the other hand, premature withdrawal may be subject to penalty charges.
| Some important terms on renewal and withdrawal of FDs | |
| Withdrawal | A term deposit holder can withdraw the principal invested along with the interest earned when the FD reaches maturity |
| Renewal | An FD holder can renew a deposit when it reaches maturity for the same tenure if she/she wants to do so. |
| Auto-withdrawal | Auto-withdrawal happens when the bank or NBFC automatically credits the maturity amount (principal + interest) to the customer’s savings bank account upon completion of the deposit tenure. |
| Auto-renewal | If an FD holder has given instructions to the bank, the deposit will be automatically renewed for the same duration at the current rate of interest. |
| Premature withdrawal | When a deposit is broken before the maturity period it is referred to as premature withdrawal. Some banks may charge a penalty for this. |
Step 1: Log on to your bank website using all login credentials. Please note that you need to have an active internet banking account to close an FD online
Step 2: Once logged in, go to the home page and click on ‘Close FD account prematurely’
Step 3: A list of all the FDs that you have will be displayed, click on the one you wish to close
Step 4: Verify details and provide password credentials to authenticate the transaction. The funds will be credited to the account that is linked to the term deposit
‘Buy and Forget’ mentality, you might sometimes lose out on better deals which you could have found even on a cursory look at available options.
Let’s say you invested Rs.5 lacs in a 5 year FD with interest rate of 0%. At the end of 5 years, the fixed deposit rates have fallen to 8%, a significant decrease over the said period. In case you had opted for auto-renewal, you would have been automatically enrolled in the same FD for another 5 years and at the same rate of 10% regardless of market rates. If you had opted for withdrawal, a new FD will offer you 8% rate of interest on the deposit.
Suppose you have bought an FD of Rs.5 lacs for a tenure of 5 years and forgot about the maturity date. At the 6th year when you do realize that you had invested in an FD, you go back to the bank and ask for withdrawal of funds. The bank obliges, but you end up losing interest for the excess 1 year of deposit because it will be considered preclosure of the account. If you had opted for auto-withdrawal, you would have received the amount in a bank account and taken decisions to grow it or let it idly earn savings interest.
1. What is maturity instruction?
When you are purchasing an FD, all banks and NBFCs ask for what is known as a maturity instruction. Instructions can be given for auto-renewal of the term deposit.
2. Can an FD be renewed online?
Yes. If the deposit account has been opened online, it can also be renewed online through net banking or mobile banking.
3. Do all banks charge a fee/fine/penalty for premature withdrawal?
This varies from bank to bank. While some banks or NCFCs may levy a certain fee, others may not.
4. Can I withdraw a tax saver deposit before the completion of the said tenure?
No. All Tax saver FDs come with a lock-in period of 5 years, before which no withdrawal can be made at any cost.
5. How to ‘break’ an FD?
In case of any kind of financial emergency, you can close the term deposit before the agreed duration and get the funds credited to your bank account.
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Fixed Deposits (FDs) are an investment product offered by banks and Non-Banking Financial Companies (NBFCs). Term Deposits or FDs require an investor to park a significant portion of funds within a financial institution for a predetermined period of time. The investor receives an interest income associated with a specific tenor. The interest income can be credited to their account either during the date of maturity (along with the returns) or at periodic intervals i.e. monthly, quarterly, half-yearly or yearly. Most financial institutions offer the FDs in two variants i.e. with premature withdrawal facility and without premature withdrawal facility.
Premature withdrawal of a term deposit would mean liquidation of the deposit prior to the date of maturity. Investors are not recommended to prematurely withdraw funds from their FD because it is usually associated with a penalty.
A majority of the financial institutions charge a penalty using the following formula: Rate for premature withdrawal = Interest rate applicable while opening the account – 1%
If an investor has opted to receive interest income at periodic intervals, the penalty is calculated and deducted from the total returns at the end of the tenor. Therefore, premature liquidation of funds negatively affects the maturity value that one gains from the FD. The penalty linked to the withdrawal varies with every bank. It is important to check the penalty charge along with the interest rates before choosing an FD scheme from a particular bank.
18 September 2018
