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How to Avoid Penalty on Premature Withdrawal of Fixed Deposit?

21 June 2022

Bank Fixed Deposit (FD) is one of the most popular investment options in our country mainly because it is considered safe and secure and investors can earn guaranteed returns. 

FDs have tenures ranging from 7 days to 10 years and you can choose any FD as per your requirements. Bank FDs can be easily liquidated whenever needed. However, if you make premature withdrawals on FD, you will have to pay some penalty ranging from 0.5% to 1% of the interest earned.  

Premature withdrawal of FD basically means liquidating the FD before its date of maturity. This is mostly done during a time of emergency. 

There are ways through which you can avoid paying a penalty on premature withdrawal on Fixed Deposits, and we have discussed some of them here in this article.

3 Tips To Avoid Penalty On Premature Withdrawal On FD 

Here are the ways through which you can avoid paying a penalty on premature FD withdrawals. 

FD Laddering 

FD laddering is a method that involves purchasing multiple FDs with different maturity dates. It is a more effective way of managing liquidity. All you have to do is break up your lump-sum investment into smaller chunks. 

For example, if you have Rs 5 lakh in fixed deposits, you can divide it into five smaller FDs and invest in a variety of FDs with different tenures. You can have five FDs maturing in a sequence after one year, two years, three years, four years, and five years. This way, you may have plenty of liquidity at hand. And if you need money in the interim, you can opt for premature withdrawal only to the extent of the money required.

Sweep-in Facility 

The sweep-in facility allows your bank to transfer any sum in excess of the amount stipulated by you from your savings account to a sweep-in deposit. The facility is known by several names depending on the bank. The deposit's term ranges from 1 to 5 years, and the interest rate changes accordingly. But by and large, the amount transferred is likely to earn you a higher rate.

Usually, you as a depositor should open an FD worth at least 25,000 with your bank to be eligible for it. 

The sweep-in service, in addition to providing a higher interest rate, helps create a separate fund. You can withdraw during emergencies without affecting your normal investments. There are no fees or penalties associated with withdrawals. Even if you take money out of the account in an emergency, the remaining balance will continue to generate interest at the same rate.

Get Loan Against FD

Almost all the banks allow their investors to take a loan against their Fixed Deposits. The interest charged on a loan of an FD is usually 1-2% more than the interest on the FDs. However, the interest rate varies from bank to bank.

There can be many reasons why you might have to withdraw your FD before its maturity date. Thus, in case of an emergency, you can use any of the aforementioned ways to safeguard your money and avoid attracting a penalty. 

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