Know the rules for premature withdrawal of fixed deposits

NEW DELHI: There is good news for retail investors: fixed deposit (FDs) rates are on the rise, again. Experts say most banks have raised interest rates on fixed deposits and it is now a good time for depositors, especially those who are conservative, to get better and assured returns on these saving instruments. However, investors need to understand the different categories of FDs and the rules concerning premature withdrawals from such deposits in case of an emergency.

The categories: Broadly, there are two FD categories: cumulative and non-cumulative. When you choose to invest in cumulative FD, banks or non-banking financial companies (NBFCs) don’t pay any interest during the deposit period. The accumulated interest is deposited along with the principal amount at the time of maturity. However, with a non-cumulative FD, you can get the interest pay-out on a monthly, quarterly, semi-annual and annual basis. The tenure of FDs may range from 7 days to 10 years.

Those wishing to avail of tax benefits must choose tax-saving FDs with a mandatory lock-in period of five years. These offer a ₹1.5 lakh tax savings deduction benefit. However, you can neither withdraw your money prematurely from such FDs nor pledge them for a loan.

Premature withdrawal rules: FDs offer the option of premature withdrawal of money but lenders will charge you a penalty for closing the deposit ahead of time. The penalty charges typically range from 0.5% to 3% of the interest rate. However, some banks do not charge any penalty if the amount withdrawn is put in some other investment option offered by them. You can close your FD online by using the mobile app of the bank or NBFC, or via net banking or by visiting the nearest physical branch of the lender concerned. Here are the rules and penalty charges regarding premature withdrawals of fixed deposits at top public banks, private banks and NBFCs.

State Bank of India (SBI): The bank charges you a penalty of 0.50% on premature withdrawal of FDs up to Rs5 lakh. However, if the investment exceeds ₹5 lakh, SBI charges you a penalty of 1% on the pre-closure of the account. Also, the bank doesn’t pay any interest on deposits that are held for less than seven days.

Punjab National Bank (PNB): The bank levies an interest penalty of 1% at the time of premature cancellation or part withdrawal of FDs for all tenors. In such a case, the interest rate payable would be the contractual rate minus 1%.

HDFC Bank: The interest rate applicable for premature closure of FDs will be lower than the original tenure rate or the base rate for the tenure that the investor has deposited money with the bank. Further, in case of premature closure of the FD account (including sweep-in and partial), the bank charges a penalty of 1%.

ICICI bank: For deposits of less than ₹5 crore, the bank charges a 0.5% penalty if you were to prematurely close the account in less than a year and and 1% if the amount is withdrawn after a year. For deposits above ₹5 crore, it charges 1.5% penalty if the account is closed after five years and 1% penalty if there is premature withdrawal in less than five years.

Bajaj Finance: FDs don’t earn any interest if the account is closed between 3 and 6 months. After six months, the NBFC will levy an interest penalty of 2-3% on premature withdrawal, subject to terms and conditions. The NBFC doesn’t allow withdrawals in the first three months.

Mahindra Finance: The rules for premature closure of FDs are the same as that of Bajaj Finance.

Choosing the right FD: For this, you must consider certain factors. Adhil Shetty, CEO of BankBazaar.com, says you must first check the interest rates offered on FDs for different tenures. Then, find out if the rates are compounded quarterly or monthly - FDs with monthly interest compounding provide higher returns. Assess the credibility of the financial institution before opening an FD account. You can also use the laddering strategy to maximise your FD returns. Laddering allows you to spread your capital across different tenures and reinvest the returns at different interest rates to create an investment loop. “Avoid choosing longer FD tenures based solely on the returns they offer. Instead, choose an FD aligned with your liquidity requirement to avoid breaking it midway,” said Shetty.

Sweep-in FDs are also a better option as these provide an interest rate equivalent to FD and liquidity similar to that of a bank’s savings account. Anup Bansal, chief business officer, Scripbox said, “There is no penalty levied on a sweep-in FD account for premature withdrawals. However, you may need to maintain a minimum balance in the savings accounts.”