Premature payment of Fixed Deposit (FD) refers to the withdrawal of funds from a fixed-term deposit before the maturity date. It is a situation where the account holder decides to terminate the FD prematurely and withdraw the principal amount along with the interest earned up to that point. Premature withdrawal is subject to certain terms and conditions set by the bank, and it typically incurs penalties or reduced interest rates compared to the original contracted rate. Here are detailed notes on premature payment of FD:
1. Reasons for Premature Withdrawal:
- Emergency Needs: Account holders may need immediate access to funds to meet unexpected expenses or financial emergencies.
- Better Investment Opportunity: If the account holder finds a more lucrative investment option, they may decide to withdraw the funds from the FD.
- Changing Financial Goals: The account holder’s financial goals or circumstances may change, prompting them to liquidate the FD before maturity.
2. Penalty for Premature Withdrawal: Banks levy penalties on premature withdrawal of Fixed Deposits. The penalty amount is usually a percentage of the interest earned or a specified amount as determined by the bank’s policy. The penalty is designed to discourage early withdrawals and compensate the bank for the loss of interest it incurs due to the withdrawal.
3. Revised Interest Rate on Premature Withdrawal: In addition to the penalty, banks often reduce the interest rate applicable to the FD in the event of premature withdrawal. The revised interest rate may be lower than the contracted rate, leading to a lower return on the FD.
4. Minimum Lock-In Period: Many banks impose a minimum lock-in period during which premature withdrawal is not allowed. This means that account holders must wait for the minimum period before they can withdraw the funds without incurring penalties.
5. Procedure for Premature Withdrawal: To initiate a premature withdrawal, the account holder must visit the bank branch and submit a written request for the same. The bank may require additional documents or information to process the withdrawal.
6. Impact on Interest Earnings: Premature withdrawal results in a reduced interest payout compared to what the account holder would have earned if the FD had been held until maturity. The total interest earned depends on the actual period the FD remained with the bank.
7. Taxation on Premature Withdrawal: The interest earned on the FD, including the penalty amount, is considered taxable income in many countries. The tax treatment may vary based on local tax laws and the account holder’s tax status.
8. Exceptions to Premature Withdrawal Penalties: Certain banks may provide exceptions to penalties in specific cases, such as medical emergencies or financial hardships. These exceptions are at the bank’s discretion and may require supporting documentation.
9. Premature Withdrawal in Special Circumstances: In case of the account holder’s demise or incapacitation, the nominee or legal heir may be allowed to withdraw the funds from the FD without penalties, subject to providing the necessary documentation.
Overall, while premature withdrawal of FD provides liquidity, it comes with the cost of reduced interest earnings and penalties. Therefore, account holders should carefully assess their financial needs and evaluate other available options before deciding to withdraw the funds prematurely.