If you plan to close your Bank Fixed Deposit (FD) before its maturity date, you may have to pay a penalty. Yes, you heard it right. Most banks allow customers to withdraw their FDs before maturity, but they charge a penalty and reduce the interest payable on the deposit. In this article, we will have a look at the penalty imposed by banks and rules for premature FD closure.
Penalty for Premature Closure
India’s largest public sector bank – State Bank of India charges followings penalty for Premature closure of FD:
- 0.50% for term deposits up to ₹5 lacs.
- 1.00% for term deposits above ₹5 lacs.
- The interest rate shall be 0.50% or 1.00% below the rate applicable at the time of deposit creation for the period the deposit remained with the bank, or below the contracted rate, whichever is lower, for term deposits up to Rs. 5 lacs and above Rs. 5 lacs, respectively.
- No interest shall be paid on deposits for a period of less than 7 days.
Understand how Banks imposed penalty on premature closure of FD
When a Fixed Deposit (FD) is closed before its maturity date, the bank does not pay the original interest rate agreed at the time of opening the FD.
Instead, it first checks the interest rate that was applicable on the date the FD was opened for the actual period the money remained with the bank. After finding this applicable rate, the bank deducts the premature closure penalty—0.50% for deposits up to ₹5 lakh and 1.00% for deposits above ₹5 lakh.
The customer then receives the lower of the reduced applicable rate or the original contracted interest rate.
For example, suppose you opened a 3-year FD of ₹4 lakh at an interest rate of 6.45%. However, you decide to close the FD after 1 year. On the date you opened the FD, the interest rate for a 1-year FD was 5.90%.
Since your deposit remained with the bank for only one year, the bank will use 5.90% as the applicable rate instead of 6.45%. As the deposit amount is below ₹5 lakh, a 0.50% penalty will be deducted. Therefore, the final interest rate payable will be 5.40% (5.90% – 0.50%), which is lower than the original contracted rate of 6.45%.
