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How to Calculate Penalty on Premature Withdrawal of Fixed Deposit?

Fixed Deposits or FDs are very popular investment options in India and if one invests a fixed amount for a particular time period, one also gets a fixed rate of interest. The interest rate might fluctuate during that period but the interest rate for the FD will remain locked in which the FD was invested in. However, there might be cases when, due to emergencies, and due to lack of funds from any other sources, one has no option but to break the Fixed Deposit and withdraw the money prematurely. Hence, interests and penalties are charged on the Long Term Fixed Deposit for the premature withdrawal of Fixed deposit and this could lead to some loss of money and other benefits.

What Happens When You Close an FD Before Maturity?

Normally, in case an FD is being closed before the completion of the term, the interest will be paid at the rate applicable on the date of the deposit, and for the period for which the deposit has remained with the bank, along with premature closure penalty.

For example, if one has invested in FD on 1 July 2012 for 4 years at 9% interest, and if one wants to break the FD just after a year, the applicable interest rate for one-year deposit in the bank when the FD was made was 6.5%. So, this reduced rate of 6.5% will be applicable and not the original rate of 9%. In case the FD is withdraw before the minimum prescribed period for which the FD should be kept, then no interest is paid at all.

Risks of Closing Your FD Prematurely

On top of that, there is the question of penalty being charged as well. Banks usually levy a penalty of 0.5% to 1% lower interest on customers who close their FDs. In case of emergency, some banks might choose to waive off this penalty but that is very rare and is a case to case basis. Otherwise, one also gets lower interest and also gets penalized for prematurely withdrawing the amount.

Depending on the sum that one had originally invested, the reduced interest rate and the penalty charges would together go on to add up to a significant amount of loss of income. Thankfully, most banks now have Fixed Deposit withdrawal calculators which take care of all these algorithms and helps in determining how much would one stand to lose in case of premature closure of Fixed Deposit.

According to the rules of the RBI, banks today have the freedom of charging their own penalties which makes it difficult to calculate your total losses if you are in need of cash and breaking Fixed Deposits from all the sources. However, it is also the responsibility of the bank to make the depositors aware of the charges on penalty if they happen to withdraw their money from the bank. It is also the responsibility of the depositor calculate all aspects before rushing into the closing of FDs and explore other options if there is an urgent need of cash.

However, it has been seen that if an FD is nearing maturity, it is best to continue with it and see the period through because all those years of investment would then go to waste. If at all the FD is to be broken, then break it in the initial days. Breaking of FDs is discouraged because it can also be used later to avail loans.

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