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Yogi Zone

Useful articles for your finance management by our team of experts

What is the Penalty on Breaking Fixed Deposits (FD’s)?

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fdpenaltyWe all invest in Fixed Deposits (FD’s) as they are safest investment option available today. Most of the time, we don’t spend too much time on thinking where to park our FDs. But we can save money if we carefully select our FD option. In order to maximise returns, while it is useful to get high interest rates, it is also a good idea to minimise the cost of unplanned FD closure. If and when we need money and break the FD untimely, not only do we lose on interest rates, because banks pay interest applicable for actual deposit period as per the rate prevalent at the time of FD  booking, but we are also further penalised by as much as 1% in the name of premature withdrawal penalty. While this may seem a small number, it becomes sizeable when actual cost is calculated. Most banks calculate interest rates for premature closure of FDs by the following formula:

Interest Rates for Premature withdrawal of FDs = Interest Rate applicable for actual period of FD as per the rates prevalent at the time of investment – 1%

Most of the banks charge premature withdrawal penalty as per the above formula for all fixed deposits, including linked FDs with sweep in facility and FDs with periodic interest payouts. In case of FDs with periodic interest payouts, where banks have already paid the investor interest as per the committed rates, banks calculate the applicable penalty at the time of redemption and reduce the final payout by the same effectively reducing the interest rate to the rate as per the above formula.

However, the premature withdrawal penalty can be completely avoided as several banks have started offering premature withdrawal without penalty. In fact you will be surprised to know that some of them also offer the best interest rates on FD’s. The following table lists interest rates offered on FDs and premature withdrawal penalties levied by major banks:

 Bank Name

1 year

3 years

Penalty

1Axis Bank

9%

8.75%

Nil

2Yes Bank

9%

8.75%

Nil

3IDBI Bank

9%

9%

Nil

4Kotak Bank

9%

8.5%

0% – 0.5%

5Bank of Baroda

9.05%

9.05%

0% – 1%

6State Bank of India

9%

9%

0% – 0.5%

7ICICI Bank

8%

8.75%

0.5% – 1.5%

8HDFC Bank

9%

8.75%

1%

9ING Vysya Bank

9%

9%

1%

10IndusInd Bank

9.25%

8.75%

1%

The above comparative shows that Axis Bank, Yes Bank and IDBI Bank offer high interest rates and also allow premature withdrawal without penalty. On the other hand, major retail banks like ICICI Bank and HDFC Bank offer lower interest rates and charge hefty premature closure penalties.

Let us take an example where Ajay has invested Rs 3 lakh each in Axis Bank and HDFC Bank for a period of 3 years but withdraws the money in 1 year. The following is the return Ajay gets from both FDs:

 

Principal Invested

3 year FD Rate

Maturity Value

Interest Rate on Closure in 1 year – Penalty

Value Received

Axis Bank

Rs 3 lakh

8.75%

Rs 3,88,950

8.75% – Nil = 8.75%

Rs 3,29,492

HDFC Bank

Rs 3 lakh

8.75%

Rs 3,88,950

8.75% – 1% = 7.75%

Rs 3,26,013

While both the FDs are offering same returns for 3 year period and the interest rate applicable for 1 year is also same in both the cases, Ajay loses out Rs 3,479 only due to penalty in case of HDFC Bank.

One might think about the case where FD rates are lower for the actual deposit period than the original period and the case where FD rates at the time of booking were higher than rates prevailing at the time of FD closure. In such cases, banks take the lower of the two rates to pay interest.

So, next time when you book your FD, do not forget to check the premature withdrawal penalty along with interest rates, else you may land up losing out on easy money!

  • Anil Kishore

    Bank of India is offering interest rate of 9.05 % for 1 year to less than 8 years and there is no penalty on premature payment of all term deposits. This bank is having business mix of Rs.7.71 lakh cr which is 2nd highest among all nationalized Banks. How the name of this bank has been left in comparison ??

    • Yogi Cfp

      Thanks for sharing the information Anil. The author could have picked up the list on some basis. We will surely take your suggestion on this and make sure such points are not missed out in the future.

  • abra kadabra

    Very useful information. keep up the good work.

    • Yogi Cfp

      Thank you.

  • Anonymous

    Sir you did not mention any thing about canara bank ?
    Suppose i have an FD of Rs 3 Lakh in canara bank for 444 days and we want to break before it’s maturity period then how much they will charge for processing charge ?
    Please reply
    My FD is near about 1-2 month old.

    • Av Suresh

      The premature withdrawal penalty is 1% for Canara Bank.

  • http://www.bankbazaar.com/fixed-deposit.html narendr

    Good article.

    One Can find more about Fixed Deposit Related article@
    http://fixed-deposit.weebly.com/

  • Mehta

    I have created 7 FD’s of different small amount with axis bank since last 6 months and I got to know that they all will be charged with Penalty for pre mature breaking. infact I had never checked on this matter until recently I had to break one FD for some urgent need. I am having relationship with Axis bank since past 5 years and I have been seeing that they dwindle in such penalties and hidden cost on name of trust and service.

  • Mehta

    I have created 7 FD’s of different small amount with axis bank since last 6 months and I got to know that they all will be charged with Penalty for pre mature breaking. infact I had never checked on this matter until recently I had to break one FD for some urgent need. I am having relationship with Axis bank since past 5 years and I have been seeing that they dwindle in such penalties and hidden cost on name of trust and service.

  • San

    Dear SIr,
    I’ve done 3 FDs with SBI (5 Lacs+5 Lcs+4.60 Lacs) on 14/07/2015. While opening the FDs I issued the cheques of another Branch(SBI) and that A/C was in my mother’s name.

    So the the FDs were made in my name but my mother’s CIF No is printed on the certificates. The only solution given by the Bnak official to change to my CIF No is to withdraw the FDs and get the entire amount credited to my Savings A/C then again do the FDs again. Then only the FDs will be made against my CIF no.

    Could you please calculate if any amount will be deducted if I withdraw the entire amount (14,60,000/-)after 7 days of opening the FDs. Then again do the same against my CIF no.

    Regards,
    SAN

  • Dhiraj Chafle

    Dear sir, my dad was invest his 6 lakh rupee for 6 years lockin period in live stock of samrudha jivan multipurpose co-operative society…. they give us monthly return but we want premature withdrawal … what is the penalty in co operative socity? Cause they said 30% cut down in actual amount around 180000..I dont know what to do…

  • http://fforfree.net Love FforFree

    this bank loots people of there own money and pay them to idiot IIMs recrutis

  • Padmaja Bhushan Joshi

    sir my mother have fd in sbi of 9lakh rs which is mature in 2018.we want to breack that fd.we have loan on that fd around rs3.50lakh.can u tell me the exact amount which we get

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