After the Reserve Bank of India (RBI) announced a cut in the repo rate during the first monetary policy meeting of 2025, discussions about lowering interest rates on fixed deposits (FDs) have increased. In this scenario, many FD investors might consider withdrawing their existing fixed deposits prematurely and reinvesting for the long term at the current rates, before commercial banks revise the FD interest rates.

Penalty on Premature Withdrawal of Fixed Deposits

FD investors should be aware that banks impose penalties on premature withdrawals, which can lead to potential losses. In certain cases, this penalty may be waived if the investor reinvests with the same bank for a long-term interest plan. Before taking any action, investors need to understand the penalty structure and the interest they will receive on premature withdrawals from their bank.

Penalty on Premature Withdrawal in Different Banks

State Bank of India (SBI) Penalty:

SBI charges a penalty of 0.50% for premature withdrawal of term deposits up to Rs 5 lakh. For term deposits above Rs 5 lakh, the penalty is 1%.

HDFC Bank Penalty:

HDFC Bank deducts 1% less interest than the original FD rate for premature withdrawals. This applies to sweep-in and partial withdrawals as well. As of July 22, 2023, the penalty is based on the period of deposit, not the contracted rate.

Punjab National Bank (PNB) Penalty:

PNB charges a penalty of 1% on premature or partial withdrawals of domestic FDs. However, if you break an FD and open a new one with the same bank, there is no penalty, provided the new FD is for a longer term than the broken one.

Features and Benefits of a Fixed Deposit (FD)

  • Assured Returns: FDs offer fixed interest rates, ensuring predictable returns on your investment.
  • Flexible Tenure: You can choose a tenure that suits your financial goals, ranging from a few days to a decade.
  • Safety and Stability: FDs are considered one of the safest investment options, providing stable growth to your savings.
  • Ease of Investment: Opening an FD is simple and requires minimal documentation, with an easy online process.
  • Loan Against FD: You can avail of loans against your FD at competitive interest rates, up to 90% of the principal FD amount.
  • Tax Deductions: Some FDs, like the 5-year tax-saving FD, qualify for deductions under Section 80C of the Income Tax Act.
  • Senior Citizen Benefits: Special FD schemes for senior citizens offer higher interest rates.
  • Periodic Interest Payouts: You have the option to receive periodic interest payouts, to help manage monthly expenses.
  • Regular Income: FDs offer periodic interest payouts, making them an excellent source of steady income.
  • Capital Preservation: Your principal amount remains safe, and you get guaranteed returns, ensuring investment security.
  • Diversification: Adding FDs to your portfolio helps balance risk and stability.
  • Liquidity: Despite the lock-in period, you can access funds during emergencies through loans or premature withdrawal.