FD Premature Withdrawal: Towards the end of the year, the Reserve Bank of India (RBI) announced significant changes impacting the common depositor. If you are planning to keep money in a Fixed Deposit (FD) or Savings Account, knowing these new rules is crucial. According to the central bank’s new guidelines, premature withdrawal of FDs could lead to substantial financial loss for customers. In some cases, you might not receive any interest at all.
Saving money in banks is a long-standing habit for Indians. Fixed Deposits, in particular, are considered one of the safest investment avenues. However, one must now exercise extra caution when withdrawing that money for emergencies. The RBI has made it clear that the minimum tenure for a fixed deposit must be 7 days. If a customer breaks the FD or withdraws the money within 7 days of opening it, they will not receive any interest. This means even if the money stays with the bank for those few days, the return will be zero.
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Major Changes in Savings Account Interest Rates
Not just FDs, rules for savings accounts have also undergone a radical change. Until now, various banks offered different interest rates on savings accounts to attract customers. However, the new regulations state that all banks across the country must offer the same interest rate on savings up to Rs 1 lakh. Whether it is SBI or HDFC, there will be no difference in interest rates for savings below Rs 1 lakh. However, for savings exceeding Rs 1 lakh, banks can determine their own interest rates.
Additionally, interest on savings accounts will now be calculated on a daily basis. This means the interest will be computed based on the closing balance of your account each day and credited to your account every three months (quarterly).
How Much Penalty for Breaking FD Prematurely?
A Fixed Deposit is essentially a contract to keep money locked for a specific period. However, customers are often forced to break FDs before maturity due to medical expenses or other urgent needs. This is called ‘Premature Withdrawal’. According to the RBI’s new rules, the FD form must clearly state upfront how much penalty will be deducted if the money is withdrawn before the term ends.
Typically, banks charge a penalty ranging from 0.5% to 1%. Let’s understand this with an example. Suppose you deposited money for 2 years at an interest rate of 7%. But you withdraw the money after 1 year. If the bank’s applicable interest rate for a 1-year tenure is 6.5%, you will be paid interest at a rate of 5.5% after deducting a 1% penalty from that applicable rate.
The concept is simplified in the table below:
| Parameters | Details |
|---|---|
| Principal Amount | Rs 1,00,000 |
| FD Tenure | 2 Years |
| Contracted Interest Rate | 7% |
| Withdrawal Time | After 1 Year |
| Applicable Rate for 1 Year | 6.5% |
| Penalty Charge | 1% |
| Final Payable Interest Rate | 5.5% (6.5% – 1%) |
Ban on Luring with Lotteries or Gifts
Often, banks offer various gifts or lottery schemes to encourage customers to open FDs. The RBI has completely banned this practice. From now on, no bank can collect deposits by luring customers with gifts. Doing so will invite punitive action.
Additional Important Information
- No Auto-Renewal: If the customer does not provide instructions, the FD will not be automatically renewed upon maturity. If the money is not withdrawn, it will attract interest at the rate applicable to savings accounts or the contracted FD rate, whichever is lower.
- Credit Card Facility: Instead of breaking an FD, you can opt for a credit card or loan against the FD. This keeps your savings intact while providing you with funds during need. Generally, loans or credit limits up to 85% of the FD value are available.
- Holiday Rule: If the maturity date of the FD falls on a bank holiday, the money will be paid on the next working day, and the customer will receive additional interest for that holiday.
Disclaimer: This report is for informational purposes only. Please read the relevant bank’s terms and conditions carefully or consult a financial advisor before making any investment or banking decisions.
