Things to Consider before Premature Closure of FD

Fixed deposits (FDs) are one of the safest and most popular investment options because they have lower risks and provide assured returns. However, FDs come with a fixed tenure during which your money is blocked. Given the uncertainty of life, you may require urgent funds to meet a medical emergency or any other expense. If you need to withdraw your investments, financial institutions allow premature closure of the deposit. It is a cumbersome process that requires completing multiple formalities. Moreover, it leads to the following:

  • A reduction in returns due to the premature withdrawal penalty
  • A financial loss, as you lose out on the actual assured maturity value
  • An inability in meeting financial goals

What are the fees applicable in case of premature withdrawal of FDs?

Financial institutions issue FDs for a fixed tenure and use these amounts for lending. When you withdraw the deposit before the end of its tenure, the institution is unable to meet its commitment. Therefore, issuing banks and non-banking financial companies (NBFCs) may charge certain fees for premature withdrawals to discourage investors.

The premature penalty can be between 0.5% and 1%. It is charged on the FD rates; however, its calculation varies from one issuer to another.

The issuing company is not liable to pay interest on the remaining period of the FD if you withdraw it before the maturity date. This significantly decreases the returns on your investment, particularly when combined with a premature penalty.

Explore alternatives

If you require urgent funds, you may consider other options instead of prematurely closing your fixed deposit investment account. Some alternatives are as follows:

  • Invest some amount in short-term FDs and the balance in longer duration FDs. By choosing different tenures, you may be able to meet any contingency fund requirements.
  • Consider taking a loan against the FD to meet monetary needs; most institutions offer 60% to 70% as the loan amount at a competitive rate of interest
  • Opt for a credit card against the FD; some institutions offer this facility with a limit between 75% and 85% of the principal, which allows you to meet any urgent financial requirements

When you open an FD, it is most beneficial to avoid premature closure and stay invested for the long term. Mahindra Finance offers many FD options at attractive interest rates. You may visit its website to know about its fixed deposit benefits.