3 ways to avoid penalties for premature withdrawal from a fixed bank deposit (FD)



Bank Term Deposit (FD) is one of the most popular investment tools in our country. It is preferred by investors because it is considered safe and secure and generates guaranteed returns. Depending on your needs, you can choose FD with a duration of 7 days to 10 years. Bank FDs can be easily liquidated when needed. However, a premature withdrawal will incur a certain penalty. As SBI imposes a penalty of 0.5% for retail term deposits of up to 5 lakh through tenures. However, there are ways to avoid penalties for withdrawing prematurely from a fixed deposit, also known as a term deposit.

Bank’s FD scale

FD Bank Ladder is a technique of buying multiple FDs maturing at different times. It’s a better way to manage cash flow. All you need to do is break your lump sum investment into smaller investments. For example, if you have 5 lakh to invest in term deposits, you can divide it into five smaller FDs and invest in different maturities. That way, you can have five FDs maturing after one year, two years, three years, four years, and five years in a row. In this way, you will have enough cash and if you need money during the interim period, you can opt for an early withdrawal only to the extent of the money required.

For example, if there is a medical emergency and you need 2 lakh. If you have a fixed deposit of 5 lakh, and you break it, you will have to pay the premature withdrawal fee penalty for the full amount. Instead, if you have five fixed deposits of 1 lakh each, you can choose to only break two fixed deposits. And the remaining money will continue to earn interest at the rate you set aside for the FD. You can keep reinvesting and that way you will always have enough cash maturing at specific intervals to serve your purpose. You can choose the scale according to your convenience and needs, there is no need to divide the whole amount equally. You can also compare FD interest rates and choose different banks for staggering and enjoy the insurance of 5 lakh on your deposits.

Read also | India should be worried about its public debt

Sweeping facility

the sweeping facility allows your bank to transfer any amount in excess of the amount you have stipulated from your savings account to a transfer deposit. Different banks have different names for the installation. For example, the State Bank of India Savings Plus Account serves essentially the same purpose. HDFC Bank offers it as a fixed sweep deposit while ICICI Bank calls it a flexible deposit. The term of the deposit varies from one year to five years, and the interest rates also vary accordingly. But overall, the amount transferred is likely to earn you a higher rate.

To be eligible, you must open an FD of at least 25,000 with your bank. In addition to offering a better interest rate, the transfer facility provides a separate corpus that you can withdraw in an emergency, without touching your regular investments. There are no fees or penalties on the withdrawal. Even if you withdraw the deposit in an emergency, the balance amount will continue to bear interest at the same rate.

Avail Loan vs. FD

You can also take out a loan because all banks allow investors to take out a loan against their term deposits. The interest charged for a loan on a term deposit is usually 1 to 2% higher than the interest paid on the deposit. The interest rate, however, depends on and varies from bank to bank. For a loan against term deposits, the SBI charges interest on a daily declining balance, with no processing fees or prepayment penalties. The bank offers loans at 1% above the relatively fixed deposit rate. SBI gives laon up to 90 percent of the value of term deposits with the bank.

To subscribe to Mint newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now !!


Previous Hammered by the pandemic, the consumer lender Aura closes its doors
Next Council approves virus relief loan program; discusses accommodation