New Delhi: There is good news for retail investors: Fixed deposit (FD) rates are on the rise again. Experts say that most banks have raised interest rates on fixed deposits and now is a good time for depositors, especially those who are conservative, to get better and assured returns on these savings instruments. However, investors need to understand the different categories of FDs and the rules regarding premature withdrawal from such deposits in case of emergency.
Categories: Broadly speaking, there are two categories of FDs: cumulative and non-cumulative. When you choose to invest in a cumulative FD, banks or non-banking financial companies (NBFCs) do not pay any interest during the deposit period. The accumulated interest is credited along with the principal amount at the time of maturity. However, with non-cumulative FDs, you can get interest payouts on a monthly, quarterly, half-yearly and annual basis. The tenure of FD can be from 7 days to 10 years.
Those looking to avail tax benefits should opt for tax-saving FDs with a mandatory lock-in period of five years. this offer a 1.5 lakh tax saving deduction benefit. However, you can neither withdraw your money prematurely from such FDs nor pledge them for loans.
Premature Withdrawal Rules: FDs offer the option of premature withdrawal but lenders will charge you a penalty for premature closure of the deposit. The penalty fee usually ranges from 0.5% to 3% of the interest rate. However, some banks do not levy any penalty if the withdrawn amount is put into any other investment option offered by them. You can close your FD online using the mobile app of the bank or NBFC or through net banking or by visiting the nearest physical branch of the respective lender. Here are the rules and penalty charges regarding premature withdrawal of fixed deposits in top public sector banks, private banks and NBFCs.
State Bank of India (SBI): The bank charges you a penalty of 0.50% for premature withdrawal from FDs up to Rs 5 lakh. However, if the investment exceeds 5 lakh, SBI charges you a penalty of 1% for pre-closure of the account. Also, the bank does not pay any interest on deposits held for less than seven days.
Punjab National Bank (PNB): The bank charges an interest penalty of 1% at the time of premature cancellation or partial withdrawal of the FD for all tenures. In such a case, the interest rate payable will be the contractual rate minus 1%.
HDFC bank: The interest rate applicable for premature closure of FD will be lower of the original tenure rate or the base rate for the period for which the investor has deposited the money with the bank. Also, in case of premature closure (including sweep-in and partial) of the FD account, the bank charges a penalty of 1%.
ICICI Bank: for deposits less than 5 crore, the bank charges a penalty of 0.5% if you prematurely close the account in less than a year and 1% if the amount is withdrawn after one year. for the above deposits 5 crores, it charges 1.5% penalty if the account is closed after five years and 1% penalty if premature withdrawal is made in less than five years.
Bajaj Finance: No interest is earned on FD if the account is closed between 3 to 6 months. After six months, the NBFC will levy an interest penalty of 2-3% on premature withdrawal, subject to terms and conditions. NBFC does not allow withdrawal in the first three months.
Mahindra Finance: The rules for premature closure of FD are same as Bajaj Finance.
Choosing the right FD: For this you should consider some factors. Adil Shetty, CEO, BankBazaar.com says that you should first check the interest rates offered on FDs for different tenures. Then, find out whether the rates are compounded quarterly or monthly – FDs with monthly interest compounding offer higher returns. Before opening an FD account, assess the credibility of the financial institution. You can also use a laddering strategy to maximize your FD returns. Laddering allows you to spread your capital over different tenures and reinvest the returns at different interest rates to create an investment loop. “Avoid choosing long-term FDs solely on the basis of the returns they offer. Instead, choose an FD that suits your liquidity requirement to avoid breaking it midway,” said Shetty.
Sweep-in FDs are also a better option as they offer interest rates at par with FDs and liquidity similar to that of a bank’s savings account. Anup Bansal, chief business officer, Scripbox, said, “No penalty is levied for premature withdrawal in a sweep-in FD account. However, you may be required to maintain a minimum balance in savings accounts.”
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