Fixed Deposit Investments offer protection against market turbulence by providing you with a fixed rate of interest throughout your investment term. While they are a safe haven for your money, circumstances make many people withdraw from them beforehand.
The most common reasons why most premature withdrawals occur are:
- An urgent need for funds or
- To invest in opportunities that offer a higher rate of return
Let’s understand the effects of pre-maturing your HDFC Fixed Deposit Scheme.
Penalty charges payable on premature withdrawals of Fixed Deposits
There is a penalty charge applicable if you withdraw from your Fixed Deposit Scheme early.
As per RBI norms, fixed deposit schemes offered by NBFCs have a 3-month lock-in period. The penalty charges levied by NBFCs are also much higher compared to banks. Some don’t offer the option of making a premature withdrawal.
A penalty of 0.5-1% gets levied if you choose to close your bank fixed deposits early. Some banks don’t offer the option to make a pre-mature withdrawal. This penalty is usually not applicable on bank Fixed Deposits that have tenure of 7-14 days.
How do premature withdrawals affect your Fixed Deposit interest rate?
As per the guidelines laid down by the RBI, in case of premature withdrawal, the interest rate paid would be till the date you have maintained the Fixed Deposit. This reduction in your Fixed Deposit interest rate is in addition to the premature withdrawal penalty.
While booking your bank Fixed Deposit, if the interest rate was 8% for a 5-year Term Deposit and 6.5% for a 2-year Term Deposit, then the applicable Fixed Deposit interest rate will be 6.5%. Add the premature withdrawal penalty amount to get your final amount.
Some banks also specify a minimum period of holding. If you withdraw your Fixed Deposit before the specified time frame, you earn no interest.
For Fixed Deposits held with NBFCs
NBFCs and corporates deduct higher penalties on pre-mature withdrawals.
- The RBI guidelines state that you will not receive even your invested amount if you wish to withdraw from your corporate fixed deposit in the first 3 months. The lock-in period is not applicable if the deposit holder has passed away.
- If you withdraw from your corporate deposit between 3-6 months of investing, you will not receive any interest on your fixed deposit.
- If you make a pre-mature withdrawal after 6 months of holding your corporate fixed deposit, you will receive an interest rate that is 2% lower than the actual deposit interest rate applicable to your holding term. If there’s no interest rate specified for that term, you receive an interest rate that is 3% lower than the minimum interest rate at which NBFCs accept public deposits.
Here are some options you can use to prevent premature withdrawals of your Fixed Deposits:
Using Fixed Deposit Sweep-in accounts
If you need money often, you can combine your savings/current account with your bank Fixed Deposit and create a Sweep Account. It is necessary to specify a threshold limit for a Sweep Account.
Suppose you specify your threshold limit as INR 25,000/-. Any amount over this threshold in your Savings Account gets transferred to your Fixed Deposit. The amount transferred to the Fixed Deposit earns the Fixed Deposit interest.
Taking a loan against your Fixed Deposit
You can take a loan against your HDFC Fixed Deposit for up to 90% of your principal amount. The interest rates on Loan against Fixed Deposits are lower as your Fixed Deposit acts as a collateral. However, your loan tenure cannot be longer than the term of your Fixed Deposit.
Also, you will continue to receive interest on the remaining amount since you still maintain the Fixed Deposit.
Note that some NBFCs are not allowed to offer loans against Fixed Deposits. So, do read through the Fixed Deposit Scheme’s terms and conditions properly before you invest.
Using a Ladder Investment Strategy
A Ladder Investment Strategy is set up by varying the dates of maturity of your Fixed Deposits. If one Fixed Deposit matures in a year, another one can mature after 3 or 5 years. This strategy will provide you with liquidity. When your Fixed Deposits with shorter terms mature, you can either reinvest in the same or choose another investment.
These alternatives can help you avoid paying pre-mature withdrawal penalties. Besides, you will also receive your entire Fixed Deposit interest amount.