Fixed deposit (FD) schemes are not restricted to risk-averse investors anymore. With high and stable interest returns, fixed deposits have become a primary investment for most investors. Anytime one gets a lump sum amount of Rs.10,000 or above, he can open a fixed deposit to earn interest on the investment. Moreover, fixed deposit plans have a flexible duration. A person with a short-time financial obligation in the near future can invest in a fixed deposit scheme for as little as seven days.
On the other hand, someone with no immediate financial need can invest in an FD scheme for up to 20 years to reap higher interest returns over a longer period. A fixed deposits calculator can help a person to get an idea about how much interest he can earn on his FD investment.
A fixed deposit has a fixed maturity date, and one cannot withdraw funds from a fixed deposit plan before the FD matures. However, there may be a situation when one needs urgent cash and may want to withdraw funds from the FD account prematurely. Breaking a fixed deposit scheme to withdraw funds partially or completely attracts penalty charges on the investment.
Here are all the details about premature withdrawal from a fixed deposit scheme.
What is Premature WIthdrawal from a Fixed Deposit
When an investor wants to withdraw funds from his fixed deposit account before the maturity date of the FD, the bank considers it a premature withdrawal. One may want to withdraw funds partially or completely from a fixed deposit account. Banks charge a penalty fee on premature withdrawals from fixed deposit schemes. Here are some facts one must know about premature withdrawals from fixed deposit schemes:
- Banks decide the interest rate on a fixed deposit scheme based on several factors, like investor category (general, senior citizen, super senior citizen), the invested amount, and the duration of the fixed deposit. Suppose an investor withdraws funds from a fixed deposit scheme. In that case, the bank will calculate the rate of interest on the rate applicable for the actual period for which the amount was invested with the bank and not the original period for which the investor created the FD account.
- Usually, banks charge a penalty fee of 1% on the interest rate if an investor withdraws funds prematurely from his fixed deposit scheme.
- If the fixed deposit investment duration falls below 181 days, the bank calculates the interest returns on the FD account on a simple interest basis.
- Senior citizen Fixed Deposit schemes are exempt from a penalty for premature withdrawals. The interest returns on these schemes stay the same even if the senior citizen depositor withdraws funds from his FD account before the scheme matures.
- One cannot withdraw funds prematurely from a Tax saving fixed deposit scheme as these schemes have a fixed duration of five years.
How to Avoid Penalty on Premature Withdrawal from Fixed Deposit Schemes
To keep one’s interest earnings high from a fixed deposit scheme, it is necessary to find ways to avoid penalty payments on premature withdrawal of funds from the FD plan. One can do so in the following ways:
- Laddering fixed deposit schemes: Laddering means dividing the lump sum amount one has into multiple fixed deposit schemes with different maturity dates. This way, one can keep a separate FD with a short maturity period for expenses in the near future, another with a longer duration for long-term financial goals, and so on. Laddering saves a person from breaking the fixed deposit scheme in case of an urgent cash requirement. Moreover, even if one has to withdraw funds prematurely, he will have to pay the penalty on a smaller amount in one of the FD schemes.
- Loan against fixed deposit: Instead of withdrawing funds prematurely from a fixed deposit scheme, one can apply for a loan against FD. It will save him from the penalty and provide the same interest returns on the FD scheme while catering to his short-term cash requirement.
It is even possible to invest in a senior citizen FD scheme in one’s parents’ name if he is not eligible for the scheme in order to avoid penalty charges. A fixed deposit calculator will help a person calculate FD returns in advance for better financial planning.