FD Premature Withdrawal Penalty Calculation (Beginner’s Guide)

Are you planning to withdraw your fixed deposit before the maturity date? Do you know that the Indian banks charge a penalty if you break your FD before its tenure? Every investor should know the impact of fixed deposit premature withdrawal on the return on investment. Therefore, in this article, we will know all about the FD premature withdrawal penalty impact on investment and how it is being calculated.

FD Premature Withdrawal Penalty

What Is a Fixed Deposit?

FD i.e. Fixed Deposit is an investment instrument that comes with the fixed duration and guarantees the fixed return on investment once the maturity period is over. Due to its risk-free nature, a fixed deposit is the most popular investment in India.

Apart from risk-free and fixed return benefits, FD also provides tax benefits under 80C if the deposit is made for more than 5 years.

Fixed Deposit scheme is available in almost all the banks in India and the deposit tenure ranges from 7 days to 10 years. Therefore, you have the freedom to choose the tenure or maturity period of the FD while investing.

Read Also –> Is FD Worth Investing In 2020?

Purpose Of a Fixed Deposit Investment

The purpose of the fixed deposit varies from person to person, however, the following are the common reason why investors go for fixed deposit schemes.

  • Emergency Fund – FD comes very handy due to its safe and guaranteed return nature. Many investors prefer to park their excess money in FD with an option to withdraw the same when required.
  • Creating Wealth – FD generates more than savings account interest and it is compounded quarterly. Therefore, it is an ultimate choice for investors who want to gain more returns with the safest investment plan possible.
  • Tax Benefit – FD deposit with tenure more than 5 years are eligible for the tax benefit under 80C. Salaries people consider FD to invest periodically to save income tax.
  • Diversify Investment Portfolio – Since Fixed Deposit is risk-free with guaranteed returns, it makes it a mandatory part of your portfolio. Investment in fixed return investments can balance your overall investment portfolio returns.

Now, we know what is Fixed Deposit saving scheme and what is the maturity period. Let’s see what is premature withdrawal?

What Is A Premature Withdrawal

Each Fixed Deposit comes with a maturity period ranging from 7 days to 10 years. Based on your investment goals, you have the flexibility to choose the maturity period.

Interest rates and benefits differ based on the FD maturity period. Interest rates of FDs having less than 1-year investment timeframe will have lesser interest rates.

However, you may wish to withdraw the fund i.e. FD before the maturity date due to some reason. If you break the FD before the maturity date, then it is considered as a premature withdrawal.

Premature withdrawals attract penalties from the Indian banks based on various criteria which we will see next in this article.

Penalty On Premature Fixed Deposit withdrawal

When you deposit money for a specific period, the bank invests that money in other investment instruments to generate returns. The same returns are then paid to you back as interest. Therefore, when you withdraw the FD or fund before the date, the bank has to arrange the fund for you and this might impact their revenue. Hence, they charge a penalty on premature FD withdrawal.

Premature withdrawal charges vary from bank to bank but most of the banks have penalty charges on interest from 0.5% to 1%.

Following is the penalties Levied by the SBI Bank on Premature Withdrawal

Policy TenureAmount < 5 Cr.Amount > % Cr.
Less than < 7 DayNo InterestNo Interest
7 days and above0.5%1%

Penalty on the premature FD withdrawal is neither applied to principal amount or interest earned. FD premature withdrawal penalty gets applied to the interest rate at the time of booking the fixed deposit.

Each bank has its own FD premature withdrawal penalty and you should check the same before investing your hard-earned money to avoid any losses in the future.

How To Calculate FD Premature Withdrawal Penalty?

Many investors have the question like – are the premature fixed deposit withdrawal penalty charges applicable on the principle amount? Or On the interest amount? Or will it apply to the overall fund i.e. principle + interest? I would say, neither of this.

Penalty will be applicable on the interest rates at which the fixed deposit was booked. Let’s try to understand with an example;

Formula to calculate the FD maturity amount is

A=P(1+r/n) ^n*t

Where

  • A = maturity amount
  • P = principal amount
  • r = rate of interest
  • t = number of years
  • n = compounded interest frequency (It is done on quarterly basis therefore it will be 4)

Example 1:

Suppose, you invested INR 1,00,000 in an FD with a maturity period of 3 years at the interest rate of 6.5%. Your maturity amount will be INR 1,21,467 if you withdraw after 3 years.

Calculation:

A=100000*{[1+(0.065/4)] ^ (4*3)}

A=100000*1.21467

A=121467

But, due to some reason, you decided to withdraw 1 year before the maturity date, then the interest rate applied will be (6.5% – 0.5%) = 6%. Your maturity amount will be INR 1,12,716.

Example 2:

Suppose, you invested INR 6,00,000 in an FD with a maturity period of 3 years at the interest rate 6.5%. Your maturity amount will be INR 7,28,803 if you withdraw after 3 years.

But, due to some reason, you decided to withdraw 1 year before the maturity date, then the interest rate applied will be (6.5% – 1%) = 5.5%. Your maturity amount will be INR 6,69,598.

Note: Actual calculation may differ at the time of withdrawal. This example is only for indicative purposes.

How To Calculating FD Premature Withdrawal Penalty in Excel?

Let’s try to understand, how can you calculate the Fixed Deposit return in excel. Using the same approach, you can also determine the FD premature withdrawal penalty as well.

We will use the FV formula in excel to calculate the Fixed Deposit maturity amount

=FV (rate, N, [pmt], [pv], [type])

  • Rate = Interest Rate per compound period
  • N = deposit tenure in months
  • [pmt] = contribution per month
  • [pv] = Initial investment (should be in negative value)
  • [type] = when payments are deposited; 0 = at the end of the period, 1 = at the beginning of the period.

Let’s try using the same to calculate the FD return for the previous scenario;

“You invested INR 1,00,000 in an FD with a maturity period of 3 years at the interest rate of 6.5%. What will be your maturity amount?”

Referring the above example,

  • Rate = 6.5%/12
  • N = 3*12 i.e. 36
  • [pmt] = empty because no monthly contribution
  • [pv] = 1,00,000
  • [type] = 1

Now, our formula will look like – =FV ((6.5%/12), 36, , -100000,1)

FD Premature Withdrawal Penalty Calculation in Excel

Maturity Amount = 1,21,467.16

Your maturity amount will be 1,17,894.86 if you reduce the interest rate by 1% i.e. 3,572.3. The loss of investment will depend on the amount deposited. 

Why Investors Go For Fixed Deposit Premature Withdrawals?

Nobody wants to make losses due to the early closure of their fixed deposits. However, sometimes we left with no other option. Following are common reasons why investors go for premature FD withdrawal;

  • Emergency Fund – Due to an unexpected fund requirement or unavoidable financial trouble, investors find no better option than the early closure of their FDs. We invest in Fixed Deposit schemes due to this very reason, isn’t it?
  • Want To Invest in Other FD – many investors consider switching to other FD because those FDs are offering more interest rates but this should avoidable unless you are getting more return then the (current interest rate + premature FD withdrawal penalty charges).
  • Want To Invest In Other Profitable Investment – Many investors park their excess money in Fixed Deposit so that, they can invest in the market as soon as the new opportunity arises. However, in this case, investing in debt funds make more sense than the fixed deposit.

Does FD Premature Withdrawal Penalty Applies To The NRE And NRO FDs Also?

Yes! FD Premature withdrawal penalty applies to NRE and NRO FDs also. However, the penalty criteria may differ from bank to bank. In a nutshell, you have to pay the penalty if you decide to break your Fixed Deposit before the maturity date for any reason.

How To Avoid Premature Withdrawal Penalties On FD?

FD premature withdrawal penalty cannot be avoidable (except bank agrees in exceptional cases) but the situation of premature withdrawal could be avoidable.

To avoid the premature fixed deposit withdrawal, you can have multiple deposits with different maturity dates. In this way, you can have access to the fund at different intervals. With Fixed Deposit, you can withdraw a partial amount which is again a challenge. Having multiple fixed deposits with different maturity dates can save you from a premature withdrawal penalty impact.

Is There Any Alternative To The Premature Withdrawal Penalty?

What to do when you require funds a month before the maturity date? If you break the FD before maturity, then you have to bear the penalty. It could be painful if you have invested more than 5 Lakh and losing 1% interest because of one month early withdrawal.

Do banks provide any alternative to save customers from loss?

Most of the banks provide loans or overdrafts against the Fixed Deposit with minimum interest rates. You can utilize these services if you can repay the loan within a few months.  This could save you from making a loss due to FD colure before maturity date. This process is very simple and fast and requires 2-3 documents.

Read Also..

Conclusion

FD is the safest, low risk and guaranteed return investment instrument but you are entitled to bear the penalty if withdrawn before the maturity date.

Penalty will be applicable on the interest rate at which the fixed deposit was booked.

You can ask for the short term loan against your fixed deposit fund to avoid premature FD closure.

Consider having multiple FD with different tenure to avoid the penalty situation.

Now, you know the fixed deposit maturity amount calculation in excel and ready to compare the difference in return by yourself.

I hope you found this article interesting and it helped in your financial and investment planning. Let me know if you have any doubts or question. What’s your fixed deposit saving story? Do share it is with the community for the better cause.

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