When and how to withdraw your FDs without losing interest

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Fixed Deposits (FDs) can give you guaranteed returns for a fixed period of time, but banks impose a penalty if you take money out before the maturity date. The penalty is usually a reduction in the rate of interest — often between 0.5% to 1% less than the contracted rate — for the period the deposit was kept. In some cases, you may end up losing part of the interest, if not all, if the FD is withdrawn ahead of schedule.

Timing your withdrawal

If you don’t want to lose interest, choose a break date as near to the expiry of a finished quarter or year of the FD as possible. Banks credit interest on finished periods, and hence breaking an FD just ahead of an interest crediting date can save you a lot of money. If possible, plan the break after a quarter, and you get interest on that portion.

Using partial withdrawal options

Some banks allow partial withdrawal of an FD without shutting down the entire deposit. This lets you withdraw only the amount you need and the remaining balance continues to earn the initial rate of interest. As an example, withdrawal of ₹50,000 from an FD of ₹2 lakh may reduce only the interest on this portion and not the balance.

Premature withdrawal without penalty

Certain FDs, mainly tax-saving or special tenure deposits, do not allow premature withdrawal. But in regular FDs, banks will waive the penalty for medical crises, death of the depositor, or when you're reinvesting the amount in another FD in the same bank. Negotiation with a bank, especially if you've multiple products there, can at times result in waiver of penalties.

Breaking FDs strategically

If you anticipate needing funds before maturity, opt for multiple small FDs instead of one large one. This will allow you to withdraw as much as you require, keeping the penalty on your investment low. Also, check if the bank offers a sweep-in facility, where excess money in your savings account is automatically swept over into linked units of FDs and can be withdrawn without penalty.

Balancing liquidity and returns

While FDs are meant to be held long-term and in stable savings, unexpected emergencies can make one need to access the funds. If you are aware of your bank's terms, choosing an appropriate break date, and availing partial withdrawal or sweep-in facility can meet your urgent requirements without forfeiting all your interest income. Proper planning before investment can make an FD break economically much less expensive.

FAQs

1. What is the method banks follow in calculating premature FD withdrawal penalties?

Banks typically re-calculate the interest at the rate that prevails for the duration for which the FD was held, and then deduct a penalty ranging between 0.5% to 1% from that rate. For example, if

you had taken a one-year FD at 6.5% but lapsed in six months, the bank will book the six-month FD rate (say 6%), deduct the penalty (say 0.5%), and pay you 5.5% interest for the same duration.

2. Can I close a tax-saving FD prematurely?

No. Tax-saving FDs are subject to a lock-in period of five years. Premature withdrawal is not allowed except in highly exceptional situations such as the depositor's death. Early closure can be provided for normal FDs by banks under penalty.

3. Is there a way to avoid penalties when encashing an FD?

Yes, sometimes. Banks will remit penalties if you are putting the withdrawn cash into another FD with them, if the withdrawal is being done for a medical need, or if you have been a long-time customer and have several products. Always query your bank first.