Banking
FD Premature Withdrawal: Penalty and Interest Rules
Last updated 17 June 2026Key Takeaways
- Premature withdrawal = breaking an FD before maturity — most regular FDs permit it.
- Interest is recalculated for the actual period held, not at the higher rate you originally booked.
- A penalty (a rate reduction) is then deducted — commonly ~0.5%–1%, but it varies by bank.
- Your principal is always returned — only the interest is reduced.
- Tax-saving 5-year FDs usually can't be broken early (statutory lock-in); after maturity there's no penalty.
What Premature Withdrawal Means
A fixed deposit is an agreement to keep a sum with the bank for a fixed term in exchange for a pre-agreed interest rate. Premature withdrawal is when you end that agreement early — either closing the whole fixed deposit or taking out part of it before the maturity date.
Banks allow this on most regular FDs as a liquidity feature, but because you're breaking the original terms, the interest you earn is reduced. The capital (your principal) is not at risk from the withdrawal itself — you get it back; it's the interest that changes.
How the Penalty Is Calculated
Breaking an FD early triggers two adjustments:
- Interest is recalculated for the period the money actually stayed with the bank, at the rate that applied to that shorter tenure — not the (usually higher) rate you locked in for the full term.
- A penalty is deducted from that rate — a reduction of typically around 0.5% to 1% (it varies by bank, amount and tenure).
In practice, banks apply the lower of these two, then subtract the penalty:
- the interest rate originally contracted for your booked tenure, or
- the interest rate applicable for the tenure actually completed.
So if shorter tenures carry lower card rates (as they often do), your effective rate falls on both counts — the shorter-tenure rate and the penalty.
Interest Recalculation Rules
The key principle: you earn the rate for how long the money was actually deposited, minus a penalty — not the rate you booked. For example, HDFC Bank's terms state that for premature withdrawal (including sweep-in/partial withdrawal), interest is 1% lower than the rate applicable for the period the deposit remained with the bank, rather than the contracted rate (effective 22 July 2023). Other banks follow the same logic with their own penalty figures.
This is why breaking a long FD very early can sharply cut your return: you lose the benefit of the higher long-tenure rate and take the penalty. Use the FD calculator to compare what you'd earn if you held to maturity, and see how FD interest is calculated for the underlying compounding.
Partial vs Full Withdrawal
- Full withdrawal (closure): the entire FD is broken before maturity. Interest on the whole amount is recalculated for the period held, the penalty applies, and the account closes.
- Partial withdrawal: some banks let you withdraw part of the FD while the remaining balance continues as a deposit. Whether this is allowed, and how the penalty applies to the withdrawn portion, depends on the bank — many treat the withdrawn part under the premature-withdrawal rules while the rest runs on.
Partial withdrawal, where available, can be a useful middle path: you access some cash without breaking the whole deposit.
Bank Policy Differences
Penalty structures differ between banks, so always check your bank's terms. As published examples:
- SBI: generally 0.50% penalty for deposits up to ₹5 lakh and 1% above ₹5 lakh.
- HDFC Bank: interest 1% lower than the rate for the period held (effective 22 July 2023).
- ICICI Bank: a charge generally in the 0.50%–1.50% range, deducted from the applicable rate, with interest recalculated for the completed period.
Some banks waive or reduce the penalty in specific situations or for certain schemes. Because the figures and conditions change, verify the current penalty with your own bank before withdrawing.
Comparison Table
| Scenario | Usually Allowed | Typical Effect |
|---|---|---|
| Full closure before maturity | Yes | Lower interest + penalty |
| Partial withdrawal | Bank dependent | Remaining FD may continue |
| Tax-saving FD | Usually not allowed | Lock-in applies |
| FD after maturity | Allowed | No premature penalty |
Worked Examples
These use illustrative rates — your actual rates and penalty will differ, so check with your bank.
Example 1 — Full premature closure. You book ₹1,00,000 for 3 years at a contracted 7%, but withdraw after 1 year. Suppose the card rate for a 1-year tenure was 6.5% and the penalty is 0.5%. Your interest is recalculated at 6.5% − 0.5% = 6.0% for the one year held — not the 7% you booked. You receive your ₹1,00,000 principal plus interest at the reduced 6.0%.
Example 2 — Holding to maturity instead. Had you kept the same FD for the full 3 years, you'd have earned the contracted 7% throughout — illustrating why breaking early costs you both the higher long-tenure rate and the penalty.
Common Mistakes to Avoid
- Assuming you'll get the booked rate. Early withdrawal pays the shorter-tenure rate minus penalty, not your contracted rate.
- Breaking a tax-saving FD. A 5-year tax-saver has a statutory lock-in and generally can't be withdrawn early — don't rely on accessing it.
- Closing the whole FD when you only need part of it. Check whether partial withdrawal is available first.
- Not comparing alternatives. A loan/overdraft against the FD may sometimes cost less than the interest you'd forfeit — weigh both.
- Forgetting tax. Interest earned is still taxable; see TDS on deposits.
Expert Verdict
Premature withdrawal is a useful safety valve, but it's rarely free. Before you break an FD, do two checks: first, see whether partial withdrawal covers your need so the rest keeps earning; second, compare the interest you'd lose against a loan/overdraft against the FD, which can sometimes be cheaper than forfeiting the higher rate plus penalty. And never park money you might need within the lock-in in a tax-saving FD — it simply can't be broken early.
— The Tips4Banking Editorial Team · checked against RBI and major-bank deposit policies
Frequently asked questions
What is premature withdrawal of an FD?
It is closing or partly withdrawing a fixed deposit before its maturity date. Most regular FDs allow it, subject to the bank's terms and an interest penalty.
How much is the premature-withdrawal penalty?
It varies by bank, amount and tenure — commonly around 0.5% to 1% (for example, SBI applies 0.5% up to ₹5 lakh and 1% above; HDFC applies 1%). Always check your bank's current terms.
How is interest recalculated on premature withdrawal?
Interest is recalculated at the rate applicable for the period the deposit actually stayed with the bank (usually lower than your booked rate), and the penalty is then deducted from that rate.
Will I lose my principal if I withdraw early?
No. You always get your principal back. Only the interest is reduced by the recalculation and penalty.
Can I withdraw only part of my FD?
Sometimes. Partial withdrawal is bank-dependent — where allowed, the remaining balance usually continues as a deposit while the withdrawn portion is treated under the premature-withdrawal rules.
Can a bank refuse premature withdrawal of an FD?
Most regular fixed deposits permit premature withdrawal subject to the bank's terms and applicable interest penalty. Tax-saving fixed deposits are a common exception because of the statutory lock-in period.
Can I break a tax-saving FD early?
Generally no. A 5-year tax-saving FD has a statutory lock-in and usually cannot be withdrawn before maturity, except in specific cases such as the depositor's death.
Is there a penalty for withdrawing after maturity?
No. Once the FD has matured, there is no premature-withdrawal penalty.
Is there an alternative to breaking my FD?
Often yes — a loan or overdraft against your FD can let you access funds without closing it, and may cost less than the interest you'd forfeit. Compare both before deciding.
Sources
- ICICI Bank — What Happens When You Withdraw a Fixed Deposit Before Maturity: https://www.icicibank.com/blogs/fixed-deposits/when-you-withdraw-fixed-deposit-before-maturity
- HDFC Bank — Terms & Conditions for Regular Fixed Deposits (1% premature-withdrawal rule, eff 22 July 2023): https://www.hdfcbank.com/personal/save/deposits/fixed-deposit/regular-fixed-deposits/terms-and-conditions
- HDFC Bank — How to Partially Withdraw Funds from a Fixed Deposit: https://www.hdfcbank.com/personal/resources/learning-centre/save/how-to-partially-withdraw-funds-from-fixed-deposit
- Reserve Bank of India — Master Direction on Interest Rate on Deposits (premature-withdrawal framework): https://www.rbi.org.in/commonman/english/Scripts/Notification.aspx?Id=351
Information only — not financial advice. Penalty rates and conditions vary by bank and change over time; verify current terms with your bank before withdrawing.