Operational Guidance on Premature Withdrawal of Fixed Deposits (FDs)

Premature withdrawal refers to the closure of a Fixed Deposit (FD) before its maturity date. While depositors may opt for early withdrawal due to unforeseen financial needs, such actions typically attract a penalty, which is generally a deduction from the interest earned on the deposit.

General Penalty Structure

Most banks impose a penal interest—usually ranging from 0.5% to 1%—based on their Board-approved policies. This deduction is applied to the interest rate applicable for the period the deposit remained with the bank.

Example – Indian Overseas Bank (IOB)

At IOB, the penalty structure for premature closure is as follows:

• No penalty for deposits up to ₹5 lakhs.
• A 1% penalty on the applicable interest rate for deposits above ₹5 lakhs.
• The revised interest is calculated at a rate lower than the original contracted rate, adjusted further by the penal rate depending on the FD’s tenure.

RBI Guidelines on Premature Withdrawal

The Reserve Bank of India (RBI) permits premature withdrawal of term deposits up to ₹1 crore, subject to bank-specific penalties. Key RBI stipulations include:

• For Individual Public Depositors:
  Withdrawal within three months from the date of deposit allows withdrawal of up to 50% of the principal amount or ₹5 lakh, whichever is lower, without any interest.
  The balance continues to earn interest at the agreed rate and is governed by standard rules.
• In Case of Critical Illness:
  Full withdrawal of the principal amount is permitted even within the three-month lock-in period, without accruing interest.
  This applies even to contracts that previously disallowed such withdrawals.

NRE Deposits

• No penalty is levied for premature withdrawal of NRE term deposits when converting into RFC (Resident Foreign Currency) accounts.
• Penalties apply for conversion between NRE and FCNR(B) deposits.

Partial Withdrawal

• Many banks allow partial withdrawals, but this facility may not be available for all types of term deposits.
• For example, Tax Saver FDs have a mandatory lock-in period of five years, and partial or premature withdrawals are not permitted during this period.

Rationale Behind Penalty

The penalty compensates the bank for potential interest income lost due to the early withdrawal of funds.

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