Premature FD Withdrawal

What is Premature FD Withdrawal?

Premature withdrawal of FD means that a fixed deposit is closed either partly or in totality before maturity. This option is available on most accounts, where the investor can access the amount at any time when it is needed due to emergencies, unforeseen costs, or when the investment priorities change.

When an FD is closed before maturity, the money does not earn the interest rate that was originally agreed upon. Instead, the interest gets recalculated using the real time the money stayed with the bank, together with any possible penalty applied.

How Premature FD Withdrawal Works

When you request an early withdrawal, the institution recalculates your interest using a revised structure. The process typically involves the following:

1. Recalculation of Interest:

   When an FD is withdrawn before its term, the bank adjusts interest according to the time the deposit was held, rather than the planned maturity period.

2. Revised Applicable Rate:

   The FD interest rate is adjusted to match the rate for the completed tenure, which is usually lower than the rate offered for the originally selected longer duration.

3. Penalty Adjustment:

   A premature withdrawal penalty is imposed after reducing the recalculated interest rate, which then lowers the overall interest payable to the depositor.

4. Final Payout:

   The payout includes the principal along with interest figured using the revised rate and tenure, producing a lower sum than the original maturity value.

Interest Recalculation Example

Suppose you deposit ₹1,00,000 in a fixed deposit for 3 years at an interest rate of 7.50%. After 1 year, you decide to withdraw it ahead of time.

Instead of applying the 3-year rate:

• The bank applies the 1-year FD rate applicable at the time of booking (for example, 6.50%).
• A penalty (say 1%) is deducted, reducing the effective rate to 5.50%.
• Interest is calculated at 5.50% for 1 year instead of 7.50% for 3 years.
• The revised interest earned would be approximately ₹5,500 for the year.
• You receive the principal of ₹1,00,000 plus the adjusted interest amount based on this recalculation.

Premature FD Withdrawal Policies of Top Banks

Premature withdrawal rules may differ between banks regarding penalty fees, interest recalculation, and required minimum holding time limits. Here is a brief outline of how some top banks manage the premature closure of fixed deposits:

HDFC Bank

HDFC Bank allows customers to withdraw fixed deposits before maturity through online or offline modes, with partial or full withdrawal options. Under HDFC Bank FD premature withdrawal rules, the interest rate is normally cut by around 1% as a penalty, and interest is recalculated based on the tenure completed.

State Bank of India (SBI)

SBI FD premature withdrawal comes with penalties linked to the deposit amount. For FDs up to ₹5 lakh, a penalty of 0.50% is generally applied, while deposits above ₹5 lakh may attract a 1% penalty. Interest is provided at a lower rate applicable for the duration the deposit is held. No interest is given if the FD is closed within seven days.

Kotak Mahindra Bank

Kotak Mahindra Bank allows early withdrawal of callable FDs, with the Kotak Bank FD premature withdrawal penalty varying based on how long the deposit is held. Shorter terms may not lead to any penalty, whereas longer periods could attract a penalty of up to 1%, lowering payout.

ICICI Bank

ICICI Bank allows partial or full closure of fixed deposits before maturity in case of personal emergencies or urgent financial needs. Based on ICICI Bank FD premature withdrawal rules, a charge usually between 0.50% and 1.50% is applied, which is subtracted from the applicable interest rate, and interest is recalculated based on the period completed. 

Axis Bank

Axis Bank allows early closure of most callable fixed deposits. Under Axis Bank FD premature withdrawal rules, a penalty of around 1% is typically applied, reducing the effective interest rate for regular FDs. Yet digital fixed deposits can offer one free withdrawal up to 25% of the deposit amount without penalty.

Canara Bank

Canara Bank allows early closure of fixed deposits. As per Canara Bank FD premature withdrawal rules, a deduction of 1% is generally made from the interest rate if the deposit is withdrawn before maturity. However, if the FD is withdrawn before completing 7 days, no interest is paid as per the bank’s policy.

Central Bank of India

The Central Bank of India allows early closure of callable deposits. According to the Central Bank of India FD premature withdrawal rules, a penalty of 1% is applied to the interest rate regardless of the deposit amount, and the final interest is recalculated based on the tenure completed. In joint FD accounts, withdrawal before maturity is permitted as per the directions provided by the depositors at the FD opening.

Bandhan Bank

Bandhan Bank allows early closure of most retail fixed deposits. Under Bandhan Bank FD premature withdrawal rules, the interest rate is generally lowered by 1% from the applicable rate, and interest is paid at the lower of the booked rate. If the FD is withdrawn within 7 days of opening, no interest is payable.

Federal Bank

Federal Bank allows customers to close their FDs before maturity, either fully or partially. As per Federal Bank FD premature withdrawal rules, withdrawals made after 15 days may attract a penalty of around 1%, resulting in a reduced interest rate. It is recommended to check the current terms and charges before closure.

IDFC FIRST Bank

IDFC FIRST Bank allows early closure of callable deposits, with interest recalculated based on the tenure completed. IDFC FIRST Bank FD premature withdrawal terms usually apply a penalty of roughly 1% to standard fixed deposits, though specific cases, such as senior citizens, may qualify for withdrawal without penalty. 

How to Close an FD Before Maturity

You can request premature withdrawal of a fixed deposit either online or by visiting the branch. The general process is as follows:

Online Process

You can initiate early closure of your fixed deposit through online banking by following these straightforward steps:

• Log In: Access net banking or the mobile app using your credentials.
• Go to Deposits Section: Navigate to ‘Accounts’ or ‘Fixed Deposits’.
• Select the FD: Choose the deposit you want to close.
• Choose Closure Option: Select premature closure or partial withdrawal.
• Confirm Details: Review penalties and submit the request.
• Receive Funds: The Amount is credited to your linked account with confirmation.

Offline Process

If you wish to close your fixed deposit in person, you may go to the branch and follow these general steps:

• Visit the Branch: Go to the bank branch servicing your FD.
• Request Closure Form: Ask for the premature withdrawal form.
• Provide FD Details: Fill in deposit and account information.
• Complete Verification: Submit ID or verify account ownership.
• Authorise Request: Sign and submit the closure instruction.
• Receive Payment: Funds are credited, and an acknowledgement is provided.

How to Avoid the Penalty on Premature Withdrawal of FD

You can also check the suitable alternatives to avoid or minimise penalties linked with premature withdrawal of fixed deposit:

• FD Laddering: Divide a lump sum into multiple FDs with different maturities to maintain liquidity and avoid closing long-term deposits.
• Partial Withdrawal Flexibility: If funds are needed, you can close only one or two smaller FDs instead of the entire investment, reducing penalty impact.
• Loan Against FD: Use your deposit as security instead of withdrawing it. Most institutions permit loans up to 80%–90% of the FD value at slightly higher interest rates.
• Sweep-in Facility: Connect your current account to an FD so extra money earns greater interest while staying available without incurring early withdrawal charges.
• Better Liquidity Planning: Maintaining staggered maturities or linked facilities ensures access to funds without disturbing long-term investments.
• Avoid Compromising Core Investments: Applying these methods supports immediate cash requirements while enabling the primary FD amount to keep generating steady interest.

Key Takeaways

Premature FD withdrawal allows investors to access funds before maturity but usually results in lower returns due to interest recalculation and penalty charges. The bank revises the FD interest rates based on the actual tenure completed and applies a reduction, typically between 0.50% and 1%. While this facility gives liquidity in times of financial need, proper planning, staggered investments, or options such as loans against FD can help prevent early closure and protect long-term earnings.