Need to break your fixed deposit early? Here's how to slash penalty costs

Learn how to minimize penalties on premature FD withdrawals by choosing the right bank and smart structuring strategies like laddering, sweep-in, and loans against FDs.

Fixed deposits (FDs) have long been favoured for their stability and assured returns. However, life’s uncertainties sometimes force investors to break their FDs before maturity, resulting in penalties and reduced returns. To help investors minimise these losses, Adhil Shetty, chief executive officer of Bankbazaar.com, shares valuable insights into how the type of bank, compounding method, and structuring strategies can make a crucial difference.

 

Public Sector Banks Offer Softer Penalties

According to Adhil Shetty, public sector banks generally impose the lowest effective costs when it comes to premature FD withdrawals.

 

“Public sector banks typically impose lower penalties on premature fixed deposit withdrawals compared to private sector banks, small finance banks, and cooperative banks. Public sector banks are generally more lenient due to their broad mandate to serve all sections of society, including those with lower income. This often translates to lower penalty rates,” Shetty explains.

 

 

In public sector banks, the penalty typically ranges between 0.50 per cent and 1 per cent. In contrast, private sector and small finance banks may charge penalties between 1 per cent and 1.5 per cent, making early withdrawals notably more expensive for depositors with those institutions.

 

Compounding Frequency: Lesser Role in Penalty Calculation

While many investors assume that the frequency of compounding, whether monthly, quarterly, half-yearly, or yearly, might impact the loss incurred on early FD closures, Shetty clarifies otherwise.

 

“The compounding frequency of an FD does influence how interest accumulates during the deposit term. However, when an FD is prematurely withdrawn, the penalty is based on the reduced interest rate applicable to the actual duration the FD was held. It does not directly impact the penalty calculation,” he says.

 

Thus, while compounding frequency affects the total returns if the FD runs its full course, it plays a minimal role in mitigating penalty impact when an investor opts for early closure. Instead, Shetty advises choosing banks with lower penalties and selecting shorter tenure deposits if early withdrawal is a foreseeable possibility.

 

Smarter FD Structuring for Flexibility and Returns

To guard against potential liquidity needs without suffering heavy penalties, Shetty recommends a few smart structuring strategies:

 

FD Laddering:

 Splitting the total investment into multiple FDs with staggered maturity dates allows investors periodic access to funds.

 

 

“By doing this, investors can access portions of their funds at regular intervals without having to withdraw the entire deposit prematurely,” Shetty notes.

 

Sweep-in Facility:

 Many banks offer sweep-in accounts, where surplus savings automatically move into FDs. These deposits provide liquidity without penalties, combining savings account flexibility with higher FD returns.

 

 

Loan Against FD:

 Rather than breaking an FD, investors can borrow against it.

 

“Banks typically offer loans up to 90 per cent of the FD value at interest rates slightly higher than the FD’s interest rate. This option helps avoid penalties while maintaining the investment,” says Shetty.