Of the various investment options available, locking your money in a fixed deposit is the safest. You can invest a lump-sum amount of money in one go for a fixed period of time. The undeniable benefit of securing your capital in an FD is its liquidity, i.e., the ability to encash the investment upon maturity. Moreover, since market conditions don’t affect the interest rates, you can enjoy fixed returns on your capital.
Fixed deposits are not only limited to risk-averse and conservative investors, they are also one of the most popular investment and savings instruments in India. FDs are widely accepted because of their secure nature. They also offer cumulative options rather than regular or interest payment options, along with relatively low risk and fixed returns.
What Is Premature Withdrawal of FD?
When you remove your capital before the date of maturity, it is called premature withdrawal. This implies modifications in the effective interest rate, along with the imposition of a penalty. The penalty value differs from one bank or NBFC to the other but is usually somewhere between 0.5% and 1%. Other factors that determine this value are- original tenure of the FD and the realized tenure (period for which the money remained in the deposit).
How is interest on FD calculated upon premature withdrawal?
There are two ways to calculate this figure. Typically, the aspects considered are booked interest rate and card rate. Booked interest refers to the interest value at which your FD was created. Card rate implies different interest values offered by the said financial intuition for different tenures at the investment time. The considered tenure is the duration between the investment date until premature withdrawal.
There are two ways in which an effective interest rate is calculated. Usually, the lower figure will be applied as the rate of interest.
- If the booked interest rate is higher than the card rate, the compelling interest is calculated using the card rate. E.g.) You invest ₹1,00,000 for two years at 8% per annum. After six months, you wish to close your FD and remove all the funds. The card rate for six months at the investment time was 7.5%. In this case, the interest calculated on the capital will be 7.5%.
- If the booked interest rate is lower than the card rate, the effective interest rate will be calculated on the basis of the booked interest rate. E.g.) You wish to withdraw the money after eight months after investing ₹2,00,000 at 7% per annum for two years. Suppose the card rate for an investment of 8 months was 7.5% back then. Then, while calculating your effective interest rate, the booked rate of 7% will be taken into account.
Advantages and Disadvantages
In case of a financial emergency, you are sometimes forced to remove funds from your FD. Compared to other investment options, FD liquidity is higher. Nevertheless, there is a downside to closing a fixed deposit before its date of maturity. It compromises the safety net established for your savings. You often lose out on a hefty amount of interest and become obligated to pay a penalty. Read the terms and conditions carefully beforehand to stay committed to your FD.
Banks typically pay interest for the entire period in which the balance is held in the bank, but 0.50% or 1% lower than the rate in effect at the time the account was opened, or lower than the agreed rate, whichever is lower . For example, in the case of early closing of an FD account at PNB Housing, the applicable interest rate is the base interest rate for the FD opening period, or the base interest rate applicable for the deposit period. is with the bank. Which of the two is lower.
Keep in mind that some banks waive penalties for fixed deposits of certain categories of customers for a certain period of time and do not charge penalties for early withdrawal of FDs. Therefore, before making an early withdrawal, first find out about the rules at the bank. In addition, most banks do not charge a penalty for withdrawals made within 7 or 14 days of account opening.