Three Smart Approaches to Avoid Penalty on Premature Withdrawal of FD

But what if you could avoid this penalty? There are three smart approaches that can help you access funds when required, without losing money in penalties.

Smart Approaches for Avoiding Penalty on Premature Withdrawal on FD:

Experts suggest opting for the below mentioned three methods for avoiding penalty on Fixed Deposit’s premature withdrawal:

1.  FD Laddering

   FD laddering helps you maintain liquidity while still earning attractive FD interest rates. Instead of investing one large amount in a single FD, you divide it into multiple smaller FDs with different maturity periods.

   How FD Laddering Works

   • Divide your lump sum into several smaller FDs.
   • Choose different tenures such as 1 year, 2 years, 3 years, and so on.
   • This ensures that some part of your money matures every year.

   Why FD Laddering Helps Avoid Penalty

   • If you need funds, you only break one or two smaller FDs.
   • The remaining FDs continue to earn the agreed rate of interest.
   • This helps you avoid breaking a large FD and paying a high penalty.

   Advantages of FD Laddering

   • You can reinvest each FD at revised FD interest rates.
   • Senior citizens can also create ladders to optimise senior citizen FD interest rates.
   • You can mix different banks’ schemes, including tax saving FDs and flexi-deposit FDs, for better diversification.

2.  Get Loan Against Your Fixed Deposit:

   Instead of breaking your FD, you can take a loan against it. Many banks allow customers to borrow up to 90% of the FD value, making it a useful option during emergencies.

   How a Loan Against Your FD Works

   • Apply for a loan against FD at the bank where your deposit is held.
   • Banks usually charge 1%–2% more than the FD interest rate.
   • You continue earning interest on your FD while repaying the loan.

   Why a Loan Against Your FD Avoid Penalty

   • You do not break your FD, so zero penalty is charged.
   • The loan interest is often lower than other credit options like personal loans or credit cards.

   Benefits of Loan Against FD

   • No processing fee in many banks.
   • No prepayment charges.
   • Useful for individuals planning their investment plan without disturbing long-term deposits.

3.  Sweep-In Facility

   A sweep-in facility links your savings account with an FD. Whenever your savings balance crosses a certain limit, the extra amount automatically converts into a fixed deposit.

   How Sweep-In Works

   • Set a minimum balance for your savings account.
   • Any amount above this limit is auto-transferred to a sweep-in FD.
   • You earn higher FD-like returns on this parked amount.

   Why Sweep-In Helps Avoid Penalty

   • If you need money, the bank simply withdraws the required amount from the sweep-in FD.
   • Only the withdrawn portion is broken, not the entire FD.
   • No penalty is levied on withdrawals.

   Benefits of Sweep-In Facility

   • The remaining deposit continues earning interest at FD rates.
   • Helps build an emergency fund without disturbing regular investments.
   • Works great for people who want liquidity along with returns.

Conclusion

Premature FD withdrawal attracts penalties, but you can easily avoid them with smart planning.

FD laddering gives you liquidity, loan against FD offers quick funds without breaking your deposit, and the sweep-in facility helps you withdraw only what you need without penalty. By choosing the right approach, you can meet emergencies without compromising on your returns or your long-term investment plan.