Breaking a Fixed Deposit (FD) before its maturity might seem like a quick solution during emergencies, but it can cost you more than you expect. Whether you’re a seasoned investor or someone just starting to save, understanding the rules and consequences of premature FD withdrawal is crucial. This guide will help you navigate bank-specific FD policies, explain potential penalties, and offer smart alternatives so you can make financially sound decisions.
In simple terms, a Fixed Deposit is a safe investment option where you lock in your money for a fixed period and earn a guaranteed interest. But if you withdraw the money before the agreed time, you might lose part of the interest and even face penalties. Let’s break down everything you need to know.
Premature Withdrawal of Fixed Deposit
| Feature | Details |
|---|---|
| Penalty for early FD withdrawal | Usually 0.5% to 1% deduction on applicable interest rate |
| Impact on returns | Interest is recalculated based on tenure, minus penalty |
| Tax implication | TDS applicable even if interest earned is reduced |
| Minimum lock-in period | Often 7 days (varies by bank) |
| Alternatives | Loan against FD, partial withdrawal (available in select banks) |
| Bank-specific rules | Penalty rates and conditions vary; always check terms |
Breaking an FD before its maturity can cost you in terms of lost interest and penalties, but understanding the rules and planning alternatives can help you avoid these losses. Always check the terms when opening an FD, and in case of emergencies, consider loan against FD or partial withdrawals before opting for a full closure.
What Is a Fixed Deposit and Why Do People Choose It?
A Fixed Deposit (FD) is one of India’s most popular investment options. You deposit a lump sum amount with a bank for a fixed tenure (say, 1 year, 5 years, or 10 years), and the bank offers a higher interest rate compared to regular savings accounts.
People prefer FDs because they are:
- Safe and low-risk
- Offer assured returns
- Easy to open
- Flexible in tenure
But this benefit comes with a condition — you’re expected to keep the money untouched until the end of the term. Breaking it early changes the deal.
see also: How Much Return Will You Get on Investing ₹2 Lakh?
What Happens If You Break an FD Before Maturity?
Let’s say you opened a 2-year FD with ₹1 lakh at an interest rate of 7%. You decide to withdraw it after 1 year. Here’s what typically happens:
- The bank will calculate the interest based on the 1-year FD rate, which might be 6.5%.
- Then, it will deduct a penalty — often 0.5% to 1%.
- So, you may end up earning just 5.5% or even less.
Here’s a quick example:
| Particulars | Amount/Rate |
|---|---|
| Initial FD Rate (2 years) | 7% |
| FD Tenure before withdrawal | 1 year |
| 1-year FD rate | 6.5% |
| Penalty | 1% |
| Final Interest Rate | 5.5% |
You lose 1.5% on interest just by breaking it early.
Disadvantages of Premature FD Withdrawal
1. Loss of Interest
The most obvious disadvantage is you earn less than expected. This could derail your savings goals, especially for large FDs or long-term plans like children’s education, retirement, or home buying.
2. Penalty Charges
Most banks apply a penalty of 0.5% to 1% on the applicable interest rate. Some even have tiered penalties based on the FD amount and tenure.
3. No Interest If Withdrawn Too Early
If you withdraw the FD before 7 days, most banks won’t give any interest at all.
4. Tax Implications
Interest from FDs is subject to TDS (Tax Deducted at Source) if it exceeds ₹40,000 annually (₹50,000 for senior citizens). If you withdraw early, your total earnings might be lower, but TDS would have already been deducted — making the situation worse.
FD Premature Withdrawal Rules Across Popular Banks
While the concept is the same, the rules vary slightly from bank to bank. Here’s a quick look:
| Bank | Penalty for Early Withdrawal | Minimum Tenure for Interest |
|---|---|---|
| SBI | 0.50% to 1% | 7 days |
| ICICI Bank | 0.50% to 1% | 7 days |
| HDFC Bank | 1% | 7 days |
| Axis Bank | 1% | 7 days |
| Kotak Mahindra Bank | 0.5% to 0.75% | 7 days |
Always check the terms and conditions on the official website or use the FD calculator provided by banks to estimate your losses.
Alternatives to Premature Withdrawal
If you’re facing a cash crunch, you might not have to break your FD. Here are some smarter alternatives:
Loan Against FD
Most banks offer loans or overdraft facilities against FDs at lower interest rates (just 1-2% above FD rate). You can borrow up to 90% of your FD amount. Example: If your FD interest is 7%, your loan rate may be 8.5%.
This way, your FD remains untouched, and you still earn interest while solving your financial need.
Partial Withdrawal
Some banks like SBI and ICICI allow partial withdrawal of FD amounts. The remaining balance continues to earn interest at the original rate. Note: Not all FDs offer this feature — check while opening the account.
Breaking only one FD (if you have multiple)
If you’ve created multiple smaller FDs instead of one large one, you can break only one FD to meet your need and keep the others intact.
see also: BOB’s 400 Days FD is Best for Investing Earn ₹35,000 Profit
How to Break an FD Prematurely – Step-by-Step
If you’ve decided that premature withdrawal is unavoidable, here’s how to do it:
Online Method:
- Log in to your net banking account.
- Navigate to Fixed Deposits.
- Select the FD you want to break.
- Choose Premature Withdrawal.
- Confirm and submit.
Offline Method:
- Visit your home branch.
- Fill out the FD closure form.
- Submit original FD receipt and ID proof.
- Amount will be credited to your account.
Most banks process the request within 1 working day.
FAQs on Breaking FD Before Maturity
Q. Can I break my FD before 7 days?
No. Most banks don’t pay any interest if the FD is broken before 7 days.
Q. Will I lose my principal amount?
No, you’ll get your original deposit back. But you’ll lose part of the interest.
Q. Is there TDS on premature withdrawal?
Yes, TDS applies if your total interest income crosses the limit, even if the FD is broken early.
Q. Can I avoid penalty charges?
Some tax-saving FDs or special FDs don’t allow premature withdrawal at all. For regular FDs, penalty-free withdrawal is rare, but you can opt for loan against FD instead.
Q. Can I close an FD opened offline using internet banking?
Yes, many banks now allow closure of all FDs online, including those opened offline — provided they’re linked to your savings account.
