Premature Withdrawal
Closing a Fixed Deposit before its maturity date, which typically results in a penalty in the form of a reduced interest rate.
Premature withdrawal (or premature closure) lets you access your FD funds before the tenure ends. Banks allow this but impose a penalty — usually 0.50% to 1.00% reduction on the interest rate applicable for the period the deposit was held. For example, if you break a 3-year FD after 18 months, the bank pays the rate applicable for 1-year FDs minus the penalty. If the 1-year rate is 6.80% and penalty is 1.00%, you earn just 5.80% for those 18 months. Some banks waive the penalty for senior citizens or for specific FD products. Tax-saving FDs under Section 80C cannot be withdrawn prematurely under any circumstances — the 5-year lock-in is absolute. To avoid premature withdrawal penalties, consider FD laddering or sweep-in (flexi) FD facilities that provide liquidity without breaking the core deposit.