FD Premature Closure: Charges, Penalties & Process

Life is not always as it seems. Unexpected emergencies or situations can knock on your door without warning. It could be a sudden medical bill, a family need, or even an opportunity that requires quick cash. When this happens, the first thought that often comes to mind is, “Can I break my fixed deposit (FD) and use that money?”

This process is known as FD premature closure. While it can provide instant liquidity, it also comes with certain penalties, reduced returns, and other consequences you should be aware of.

Let us understand everything about FD premature closure in this blog. 

What Does FD Premature Closure Mean? 

When you open a fixed deposit, you agree to stay invested for a fixed period. Withdrawing money before the pre-decided period ends is called a premature withdrawal.

It simply means withdrawing your fixed deposit before its agreed-upon maturity date. Now, if you opt for FD premature closure, banks will charge a penalty. 

Picture booking a non-refundable hotel room and then cancelling. There’s a penalty. 

Premature FD closure works the same way. While banks allow you to do it, you’ll face FD premature closure charges, lower interest rates, and additional paperwork. As per the Reserve Bank of India (RBI), banks can permit premature closure but must disclose the penalty clearly. 

Why FD Premature Closure Matters (The Hidden Costs & Effects)?

Breaking an FD affects your finances in several ways. The penalty is subtracted from the interest earned or the total amount you receive at the time of FD redemption.

1. FD Premature Closure Charges

Banks/financial institutions levy penalties when you close an FD early. Here is what is common:

• Most banks deduct 0.5% to 1% from the applicable interest rate.
• Some banks may go beyond that, depending on the tenure, amount, or bank policies.
• If you close the FD within 7 days of booking, usually no interest is paid at all.
• Some banks may apply a 0.75% penalty if the FD is withdrawn before 181 days. 

So, always check the specific FD premature closure charges with your bank before making a decision.

2. Effect on Interest Earned

When you close an FD early, the bank recalculates your earnings. The interest is paid at the rate applicable for the period you actually held the deposit, minus any applicable penalties. 

Example: You open an FD of ₹1,00,000 for 1 year at 7% p.a. You close after 6 months. The 6-month rate at booking was 6.25%. After applying a 0.50% penalty, the rate becomes 5.75%. 

Interest earnings: ₹1,00,000 × 5.75% × (6/12) = ₹2,875. This is much lower than the full one-year return you expected.

You can also use an FD premature closure calculator available on bank websites to estimate the exact payout.

3. Can It Affect Your Loan Eligibility?

Some banks offer loans against FDs (i.e., secured loans with FDs as collateral). But if the FD no longer exists (closed), that option vanishes. Frequent premature closures may also signal to banks that your financial situation is unstable, which could potentially affect your future loan eligibility.

So, breaking your FD might mean losing access to lower-cost loans.

4. Disruption to Financial Planning

You may have opened the FD for a goal such as retirement, education, or a safety net. Premature closure disturbs that plan. You lose the power of compounding and may fall short of funds for future needs.

How to Actually Break an FD Early (Step by Step)? 

If you’ve decided it’s absolutely necessary, here is how you can proceed.

Offline Method (Branch Visit)

• Visit the branch where your FD was opened. 
• Ask for a premature withdrawal/closure form. 
• Fill in details: your name, FD number, account number to which funds should be credited, etc.
• Attach proof of identity, original FD receipt (if physical), and any other documents as required.
• The bank will compute the amount after the penalty and credit it to your linked savings/current account.  

Online/Net Banking Method

Many banks allow closing the FD online if the FD was created digitally:  

• Log in to internet banking or the mobile app.
• Under “Deposits/Fixed Deposits/Manage FD”, you may see the “Closure/Renewal of Fixed Deposits” option.
• Select the FD, confirm the withdrawal, and accept the terms.
• Banks will deduct penalties and credit the balance.

Is There an Option? Alternatives to Premature Withdrawal

Before you break your FD and incur losses, consider these options:

1. Take a Loan Against Your FD

Many banks offer overdraft or loan/credit against FD, where you can borrow a portion (often up to 90%) of your FD amount at a lower interest rate. The FD continues to earn interest while serving as collateral. 

This keeps your FD intact, maintains compounding, and gives you liquidity. In many cases, this is smarter than breaking the FD.

2. Partial Withdrawal (If Allowed)

Some banks allow you to break only a part of the FD (i.e. withdraw a portion) while the rest continues to earn. If your FD terms permit partial closure, this offers flexibility. 

However, this isn’t universally allowed. Check with your bank before making any decision. 

3. FD Laddering Strategy (Pre-Planning)

If you often foresee needing liquidity, build multiple FDs of staggered durations (1-year, 2-year, 3-year). That way, you always have some FD maturing sooner, reducing the need to break a long-term FD.

Final Thoughts 

Prematurely closing an FD is often a trade-off between immediate liquidity and forgone returns.

If you can avoid breaking your FD, do so. If not, take the loan-against-FD route if available. If you must break it, know exactly how your bank calculates the charge, use an FD premature closure calculator to estimate what you’ll receive, and proceed only when necessary.

Before initiating, always check your bank’s terms & conditions on FD premature closure: the penalties, minimum lock-in (if any), whether online withdrawal is allowed, etc.

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