Home >Money >Personal Finance >How penalty for premature termination of fixed deposits is charged

Axis Bank today announced the removal of penalty on premature closure of all new retail term deposits booked on or after 15 December 2020 for a tenure of two years or more. In this piece, we explain how the penalty is generally calculated on bank fixed deposits (FDs) in case of premature termination. Premature termination is applied when you break an FD before its maturity date.

According to Axis bank's press release, "For new deposits booked for a tenure above 2 years, there will be nil premature penalty if the entire deposit is prematurely withdrawn post 15 months of booking." A retail deposit is one which is less than 5 crore in value.

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In traditional FDs, a 1% penalty on the interest amount is applicable. In other words, customers are given the interest rate applicable for the period for which the deposit is actually maintained minus 1%. For example, if a three-year deposit with an 8% interest rate is terminated after 2 years, the interest rate for a two-year FD (on the date that the FD was made) is given minus 1%. For instance, if the interest rate on the two-year FD was 7%, the bank will pay out 6% on premature termination.

What depositors can do?

New retail depositors have the option to open a sweep-in fixed deposit account with their bank. This way, you will not only get better interest rate but also you will not be charged any penalties on withdrawal.

Sweep-in fixed deposit is a facility that banks provide to their savings account holders. To avail this facility, the depositor needs to link their savings account to their fixed deposit account and set a specific money transfer limit for a specific period of tenure (the tenure of the deposit can vary from one year to five years, and the interest rates also vary accordingly). When the balance in the savings account goes beyond that limit, the surplus balance gets automatically transferred to the linked fixed deposit account.

For instance, suppose you have linked your savings account with your FD account for one year. Now, when you opt for the sweep-in facility, you will have to set a limit (for example 50,000) beyond which any amount will get automatically transferred to the FD account. Let’s say, your current balance is 40,000 and you received 30,000 from a client that you transferred to your savings account. In such a case, your bank balance will rise to 70,000, which in this case will be 20,000 above the limit you had set. Hence, the bank will automatically transfer the excess of 20,000 to your linked FD account.

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