Exiting a Fixed Deposit (FD) before maturity usually incurs penalties, which can reduce your interest earnings. Banks may charge a premature withdrawal fee and apply a lower interest rate, making early withdrawals financially less favorable than holding the FD until maturity.

A) How Premature FD Withdrawal Works

  • If you break your FD early, the bank will apply the interest rate applicable for the actual tenure your FD was active, which may be lower than the originally agreed rate.
  • An early exit penalty (usually 1%) is deducted from the applicable interest rate.

B) Example Calculation

Let’s say you invested ₹10,000 for 3 years at an 8% interest rate. However, after 2 years, you decide to withdraw the FD early.

  1. Revised Interest Rate

    • The applicable 2-year FD rate at the time of withdrawal = 6%
    • Early exit penalty = 1%
    • Effective Interest Rate = 6% - 1% = 5%

  2. Interest Calculation

    • Original Interest (8% for 2 years) → ₹10,000 × 8% × 2 = ₹1,600
    • Revised Interest (5% for 2 years) → ₹10,000 × 5% × 2 = ₹1,000

  3. Final Settlement Amount

    • Scenario 1(If no interest has been paid so far):
      • You will receive ₹11,000 (₹10,000 principal + ₹1,000 interest).
    • Scenario 2(If the bank already paid ₹1,600 in interest):
      • The bank will recover the excess ₹600, and you will receive ₹9,400 (₹10,000 - ₹600).

C) Important Notes

  • The above example is for explanatory purposes; actual payouts may vary due to TDS deductions and bank-specific interest calculations.
  • NBFCs (e.g., Bajaj, Shriram, Mahindra Finance) may have stricter policies, where exiting an FD between 3 to 6 months may result in no interest payout, even if the lock-in period is just 3 months.