If you are planning to invest your surplus for about three months but may need the money in between, fixed deposits can become one of your options. State Bank of India (SBI) will now not charge any premature withdrawal penalty for FDs of tenors up to 90 days. SBI, which till now charged a flat 1% premature withdrawal penalty, has reduced the rate to 0.5% for FDs of maturity periods above 90 days.
FDs come with a fixed tenor and you need to pay a penalty for premature withdrawals. However, the fee varies widely among banks. While in most banks, it is in the range of 1-2%, some others determine it based on the time for which the money was with the bank and whether the deposits are renewed with it or not. Here renewal means shifting your existing FD to a higher-rate FD from the same bank.
For instance, IDBI Bank Ltd does not charge anything if the customer renews his FD with the bank; otherwise the charge is 1% across all tenors.
The penalty will obviously impact your overall returns, but the extent to which it gets reduced may depend either on the prevailing rate of interest on the FD from the same bank for the same tenor or on the contracted rate at which you signed in for the FD. The penalty amount is deducted from the lower of the prevailing and contracted rates.
For instance, let’s assume the prevailing rate on a one-year deposit is 9% and the contracted rated was 10%. If the penalty is 1%, the return rate you get is 9% (lower of the two) minus 1%, which comes to 8%. However, if the prevailing rate had gone up to, say, 11%, the return rate would have become 10% minus 1% or 9%.
The final return
Your returns will see a further hit due to the tax incidence. Interest from all FDs is taxable at your marginal tax rate, which could be as high as 30.9% for those in the highest tax bracket. Since post-tax returns from FDs are not always able to beat inflation, it’s best to be careful about choosing the tenor to maximize your returns.