Understanding the Concept of Premature Withdrawal in Fixed Deposits

Understanding the Concept of Premature Withdrawal in Fixed Deposits

15 March 2024 | By INDIE

Many individuals seek to supplement their regular income with passive earnings, and fixed deposits present a viable avenue for diversifying their investments. By opting for a fixed deposit, you can secure guaranteed returns over a specified investment period. Commonly referred to as term deposits, fixed deposits cater to a diverse demographic, including both working professionals and retired senior citizens. 

The tenure of fixed deposits spans from 7 days to 10 years. The interest rates associated with fixed deposits vary among banks and financial institutions, influenced by factors such as the investment duration and the credit rating of the bank. It's important to note that each bank establishes its unique terms and conditions when offering fixed deposits to the public.


The Basics of Fixed Deposits

Before diving into premature withdrawal, it's crucial for you to grasp the basics of fixed deposits. When you open an INDIE fixed deposit, your funds are deposited for a specified tenure, typically ranging from a few days to several years. In return, you get interest on the deposit at a predetermined rate, providing a secure avenue for your savings.


What is Premature Withdrawal?

Premature fixed deposit withdrawal refers to the act of withdrawing your funds from a fixed deposit before the completion of the agreed-upon maturity period. While fixed deposits are meant to be kept until maturity for maximum returns, unexpected situations might require you to access your funds earlier.


Implications of Premature Withdrawal in Fixed Deposit

Opting for premature FD withdrawal can have consequences, including a potential reduction in the interest rate. Financial institutions often impose penalties or lower the interest rate on premature withdrawals, impacting the overall returns on the investment. It's crucial for you to familiarise yourself with the terms and conditions specified by the bank or institution regarding premature withdrawal.


Reasons for Premature Withdrawal

Several reasons may prompt you to consider FD withdrawal. These include urgent financial needs such as medical emergencies, unexpected expenses, educational requirements, or investment opportunities that demand immediate capital.


Penalties and Interest Rate Adjustments

Banks typically impose penalties for premature fixed deposit withdrawals, and the specific penalty structure varies among institutions. Additionally, the interest rate applicable to the premature withdrawal may be adjusted, leading to a lower return than initially anticipated. Understanding the penalty and interest rate adjustments can help you make informed decisions.


Considerations Before Opting for Premature Withdrawal

Before deciding on a premature fixed deposit withdrawal, you should carefully evaluate the financial implications. Comparing the penalty FD breaking charges, assessing the impact on overall returns, and exploring alternative sources of funds are essential steps. Additionally, you should communicate with the bank or financial institution to gain a clear understanding of the specific terms governing premature withdrawal.


Alternatives to Premature Withdrawal of Fixed Deposit

Premature withdrawal of a fixed deposit may entail penalties and reduced interest rates, impacting overall returns. Before opting for such a step, you can explore alternative options to meet your financial needs without compromising the fixed deposit. Here are some alternatives to consider:


Loan Against Fixed Deposit

Some banks allow you to take a loan against your fixed deposit without breaking it, while keeping the investment intact. The interest rates on such loans are often lower compared to other forms of credit.


Partial Withdrawal

Some financial institutions offer the option of partial withdrawal, allowing you to withdraw a portion of the fixed deposit amount while keeping the rest invested. This way, you can access needed funds without losing the entire investment.


Emergency Fund Utilisation

If the need for funds is due to an emergency, you should consider tapping into your emergency funds before resorting to premature withdrawal of fixed deposits. An emergency fund provides a cushion for unexpected expenses.


Exploring Other Investments

Depending on your financial goals and risk tolerance, you may explore other investment options to generate liquidity. Liquid mutual funds or short-term investment plans could offer alternatives with potentially higher returns.


Utilising Redundant Assets

You may consider selling redundant assets or possessions that are not essential for daily living. This can provide a source of funds without affecting fixed deposits.


Liquidating Other Investments

If you have other investments, such as stocks or mutual funds, that are more liquid than fixed deposits, you can consider them for liquidation to generate the necessary funds.


Recommended Read: Tax on Fixed Deposit Interest



While fixed deposits provide a secure and stable investment option, the concept of premature withdrawal introduces flexibility for you when facing unexpected financial challenges. However, it's imperative for you to weigh the implications, understand the penalties, and explore alternatives before opting for premature withdrawal. By doing so, you can make informed decisions that align with your financial goals while mitigating potential setbacks in returns.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.