On Monday, Axis Bank announced that it would waive the penalty for premature redemption of fixed deposits (FDs) – booked or renewed on or after December 15, 2020, for tenures of two years or more. You can now withdraw your deposits after 15 months, without paying any penalty. This rule is applicable to non-senior and senior-citizens having FDs with the bank. This is the first leading private bank to introduce such an offer for its retail customers.
On account of their safety and assured returns, bank fixed deposits (FDs) have long been popular investments in many of our portfolios. Although FDs allow you to redeem your money at any time, they deduct a penalty.
“We want to offer flexibility, convenience and encourage retail customers to go for long-term savings without worrying about the sudden need for liquidity. This will also improve our book quality,” says Praveen Bhatt, EVP- Retail Liabilities and Direct Banking Products of Axis Bank.
Most other banks levy a charge for early withdrawals.
Banks charge for premature withdrawals
State Bank of India (SBI), ICICI Bank, HDFC Bank and Kotak Mahindra Bank charge a penalty of 0.5-1 percent for premature FD closures.
For instance, SBI charges a penalty of 0.50 percent across all tenures for investments of up to Rs 5 lakh. If the investments in FDs are above Rs 5 lakh and below Rs 1 crore the premature withdrawal penalty is 1 percent for all tenors. The bank does not pay any interest on FDs withdrawn within seven days.
Also read: The best mode of operating an FD account that factors in emergency withdrawals
How much is the penalty?
For an FD of Rs 4 lakh, SBI charges Rs 2,000 as penalty from your deposit amount for early withdrawal of your FD. If the FD amount is Rs 20 lakh, then you will end up paying a penalty of Rs 20,000.
Puneet Kapoor, President – Products, Alternate Channels and Customer Experience Delivery of Kotak Mahindra Bank says, "We do not charge premature withdrawal for all FDs with original tenor up to 180 days, irrespective of the FD amount. For FDs with original tenor more than 181 days, the charge is 0.5 per cent."
Says VN Kulkarni, Former Banker and financial counsellor, “There are some public sector banks which do not charge for premature withdrawals. For instance, Bank of India has already waived such charges on early withdrawals. Private Banks are not ready to do so as it will reduce their fee income.”
How do I close my FD early?
You can exercise the premature withdrawal facility on your FDs in two ways – offline and online. To withdraw offline, you will have to visit the bank branch along with your FD receipt, premature withdrawal form and other documents. Several banks allow early online withdrawal only for FDs that were invested online using their net or mobile banking facility.
Also read: 5 factors to consider before choosing a fixed deposit
Is there a way to avoid penalties?
Apart choosing the right tenure through which you can stay invested, there is one more way to manage your cash flows better. Instead of investing a lump-sum, opt for a ‘Sweep Account’ with the bank. Such an account allows you to decide the minimum amount to be kept in the savings account, and any excess sum is automatically converted into an FD. Later, if your account balance is low and you try to withdraw money from your bank account or a cheque is presented for clearing, the sweep-in FD is liquidated to that extent. Also, sweep-in does not impose premature withdrawal penalties.