Post Office Fixed Deposit Premature Withdrawal

Post Office FD Premature Withdrawal Rules

• First 6 Months: Early closure is not allowed under any circumstances.
• 6 Months to 1 Year: Early withdrawal is permitted, but you only earn interest at the Post Office Savings Account rate.
• 1, 2, or 3-Year Deposits (After 1 Year): Interest drops by 2% from the original Time Deposit rate for each completed full year.
• 5-Year Deposit: Closed after 4 years, the payout drops to the Post Office Savings Account interest rate.

How Premature Withdrawal Impacts Your FD Returns

A Post Office Fixed Deposit being withdrawn prematurely will impact the amount of interest you get since the deposit will not be earning the originally agreed post office FD rates. Instead, the interest is recalculated for the period the money was kept in the investment. This means that the returns are typically below the contracted FD interest rate. 

Make sure to check these rates before planning post office premature withdrawal FD:

Example

Let us suppose you have invested ₹2,00,000 in a 5-year Post Office FD which gives return of 7.5% p.a. You withdraw it after 3 years. The interest will be recalculated at 5.1% per annum as a result of premature withdrawal, as opposed to 7.5% per annum.

Step-by-step calculation:

= ₹2,00,000 × 5.1% × 3

= ₹2,00,000 × 0.051 × 3

= ₹30,600

Total amount received after 3 years:

₹2,00,000 + ₹30,600 = ₹2,30,600

The example shows that the recalculation with a lower rate decreases the total interest as opposed to the initial FD interest rate.

How to Close a Post Office Fixed Deposit Prematurely?

The early withdrawal of your Fixed Deposit can be done online or offline. Follow the steps below for each: 

Offline Method (Branch Visit)

• Visit Branch: Go to the Post Office branch where you opened the deposit.
• Carry Documents: Bring your original deposit passbook and a valid ID proof.
• Fill Form: Request and complete the premature withdrawal form.
• Receive Payout: Hand over the form and passbook to receive the money in your Post Office savings account or by cheque.

Online Method (Internet Banking)

• Log In: Open the India Post Internet Banking portal and sign in.
• Open Requests: Select General Services, click Service Requests, then click New Request.
• Submit Request: Choose the Time Deposit Closure option, select your account, and submit using your OTP or transaction password.

Disadvantages of Post Office Fixed Deposit Premature Withdrawal

Before opting for a premature withdrawal, here are the key drawbacks to consider:

• Less Interest Earnings: Your total profits are reduced, as the FD is withdrawn prior to completing the term. You miss out on better interest rates and the added interest of compound interest due to premature withdrawal.
• Post Office Credit Card Against FD: An FD pledged as security to a Post Office Bank credit card against FD may not be withdrawn prematurely until all outstanding dues are settled. A No Objection Certificate (NOC) to confirm a complete repayment might be required by the bank. Up to that time, the FD will work as collateral.
• Penalty Charges: Penalty charges on the early withdrawal of FDs at the post office bank can cost you less of your final payout. This penalty varies depending on tenure and the value of the FD.
• Impact on Financial Objectives: Fixed deposits are likely to be part of the long-term financial planning. Early retirement could interrupt or delay financial gains like buying a house or educating your children.
• Delayed Processing: The processing may be quick, but premature withdrawal may be held pending verification, and funds may not be easily available, which hampers the need for money in emergencies.

Tax Implications on Post Office Fixed Deposit Premature Withdrawal

Interest earned on early Post Office FD withdrawal is added to your total income and taxed according to your tax slab. Tax is automatically deducted (TDS) if total annual interest crosses ₹50,000 for regular citizens or ₹1,00,000 for senior citizens. 

How to Avoid Post Office Fixed Deposit Premature Withdrawal?

The following are some of the ways to prevent the premature withdrawal of FD:

• Calculate Your Interest: With the Post Office interest rate calculator , you can select the tenure that fits your financial ambitions. By doing so, you would not have to withdraw the FD prematurely and face penalties.
• Split Up into Multiple FDs: Split up your investment into two smaller FDs with different maturities. You may have one FD and leave the rest of them in case of an emergency.
• Maintain Emergency Fund: It is always wise to maintain an emergency fund in a liquid savings account or mutual fund, so that you do not need to prematurely close your FD when there is an emergency.
• Sweep-in/ Flexi FD: Post Office Bank is providing a sweep-in facility that sweeps excess funds from your savings account into FDs automatically. This can help you avoid premature withdrawal of your fixed deposit.