Fixed deposits are considered safe and predictable by most investors, and they mostly are. But when you decide to go for an early exit, things start getting complicated. That’s when most depositors discover that premature withdrawal isn’t just a flat penalty on paper; it’s a recalculation of the entire interest you thought you’d earn, and the rules differ depending on whether you’re breaking a bank FD, an NBFC deposit, or a Post Office time deposit. Understanding exactly how the payout is processed and what the TDS and tax implications are can save you from an unpleasant surprise the day you close the account.
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What Counts as Premature Withdrawal of an FD
Simply put, premature withdrawal means breaking your FD, fully or partially, before its original maturity date. Banks can provide this facility under the RBI’s Master Direction – Interest Rate on Deposits, 2025, and every bank sets its own penalty through a board-approved policy, which must be clearly communicated to the depositors, typically done through the FD receipt.
Worth knowing upfront:
- Tax-saver FDs (the 5-year, Section 123 lock-in type) are generally not eligible for premature withdrawal except in specific situations, such as the death of the depositor.
- Another preferable option is a loan against the FD, where you would keep the original interest rate and only pay interest on the amount of the loan utilized.
- Death of the depositor is an exception in all banks with no exit penalty; the nominee/legal heir is paid back at the contracted rate of return.
How the Penalty Is Actually Calculated
There are two layers to it:
- The rate reset: You will not be paid the rate you booked. For example, for HDFC, the payable rate is defined as 1% below whichever is lower: the rate for the original contracted tenor or the rate applicable to the tenor for which you held the deposit.
- The penalty: The extra 0.5-1% (like the one already included in point 1, for HDFC) further lowers the effective rate.
Suppose you made a 3-year FD at 7.5% per annum and redeemed it after 12 months. Your booking date rate at the bank was 6.5% for 1 year. Once that 1% penalty is deducted, you make around 5.5% for that duration instead of 7.5%. If you had deposited ₹5,00,000, then you would have earned only ₹27,500 in interest instead of the ₹37,500 earned at the booked rate.
Premature FD Withdrawal Charges: Major Banks
Public sector banks
| Bank | Penalty / Rate Reduction | Applies When |
| SBI | 0.50% / 1.00% | 0.50% for retail term deposits up to ₹5 lakh; 1% above ₹5 lakh and below ₹2 crore, across tenures |
| PNB | 1.00% | Domestic term deposits; applies across tenures for premature cancellation/part withdrawal |
| Bank of Baroda | Nil / 1.00% / 1.50% | No penalty up to ₹5 lakh if held for at least 12 months; 1% for deposits not held for 12 months and deposits above ₹5 lakh but below ₹1 crore; 1.5% for ₹1 crore+ with 31 days’ prior notice |
| Bank of India | As per the applicable penalty schedule | Premature closure is generally based on the lower applicable rate for the actual period or contracted rate, less any applicable penalty, and no interest within 7 days. |
| Union Bank of India | 1.00% | Retail term deposits below ₹2 crore held for at least 7 days |
| Canara Bank | 1.00% generally | Domestic/NRO term deposits; certain ₹3 crore+ callable deposits have different/waived penalty treatment |
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Private sector banks
| Bank | Penalty / Rate Reduction | Applies When |
| HDFC Bank | Generally a 1.00% rate reduction | Premature closure is generally based on the lower applicable rate for the period held or contracted rate, with the applicable penalty/rate reduction. |
| ICICI Bank | 0.50% / 1.00% / 1.50% | Below ₹5 crore: 0.50% for <1 year and 1% for 1 year+; ₹5 crore+: 0.50% for <1 year, 1% for 1–<5 years, and 1.5% for 5 years+. |
| Axis Bank | Generally a 1.00% rate reduction | Eligible rupee term deposits below ₹5 crore; the first partial withdrawal up to 25% of the original principal can be penalty-free, subject to conditions. |
| Kotak Mahindra Bank | Nil / 0.50% / 1.00% | Nil up to 180 days; 0.50% for >180 days to 364 days; 1% for 365 days and above |
Note: Banks generally reduce the interest rate payable rather than deducting the stated percentage directly from the principal. Penalties can also vary by deposit size, tenure, deposit type, and booking date. Check the bank’s current terms before premature closure.
NBFC and Post Office Deposits: Different Rules Entirely
These are frequently confused with bank FDs, but the rules are separate:
- NBFC/HFC public deposits: Small deposits (≤₹10,000) can be withdrawn in full without interest within 3 months. In case of larger deposits, up to 50% or ₹5 lakh (whichever is less) can be withdrawn within three months, without interest. 100% withdrawal of the principal without interest is allowed within 3 months for critical illness (as defined by IRDAI). This does not apply to bank FDs.
- Post Office Time Deposits: No withdrawals before 6 months. The Post Office Savings Account rate will apply between 6 months and 1 year. After 1 year, the rate will be the rate of your completed tenure minus 1%. The 5-year TDs have a Section 123 (previously 80C) tax advantage, but if closed after 4 years and before maturity, you only get the Post Office Savings Account rate.
Tax Impact: TDS, Deductions, and Reporting
FD interest, whether it is full term or prematurely withdrawn, is taxed under “Income from Other Sources” at your slab rate. So even when you close early, only the interest you’ll earn is affected.
Note: Since 1 April 2026, TDS and deduction provisions fall under the new Income-tax Act, 2025. For Tax Year 2026-27 onward, the renumbered sections will apply.
- TDS (now Section 393(1), Table Sl. 5) applies once interest from a bank/post office crosses ₹50,000/year for regular individuals or ₹100,000/year for senior citizens.
- The TDS rate remains 10% with a valid PAN; 20% without.
- These thresholds apply regardless of which tax regime you file under.
- To avoid or reclaim TDS, file Form 121 if your estimated tax liability for the year is NIL.
- Separately, the senior-citizen interest deduction (now merged into Section 153) is available only under the old tax regime. Under the new/default regime (now Section 202), full FD interest is taxable with no equivalent relief.
A less obvious yet favorable consequence of early withdrawal is that since the interest rate on the payout is lower, you may remain below the TDS threshold and avoid the hassle of filing.
When Breaking the FD Still Makes Sense
- An emergency where taking a loan against the FD is not immediately viable or is not offered.
- If FD rates have risen significantly post-booking, it may be worthwhile to break the FD and invest the funds to receive an overall higher return for the period remaining, even after taking the penalty into account.
- Merging a large number of small FDs into fewer, better structured FDs.
- Planning so that you don’t have to close your FDs again by structuring your liquidity with an FD ladder.
It is always best practice to run the numbers first. The quoted ‘1% penalty’ is rarely the true cost.
Premature FD Withdrawal Rules Frequently Asked Questions
The bank generally recalculates interest based on the applicable rate for the amount and period the deposit actually remained with it, rather than simply paying the original contracted FD rate. A premature-withdrawal penalty may then be applied according to the bank’s policy.
Usually, no. The interest payable is generally based on the rate applicable to the period for which the deposit was actually held. This can be lower than the rate originally booked for the full tenure.
It is a reduction or charge applied when an FD is closed before maturity. The exact penalty is bank- and product-specific, so there is no single penalty percentage that applies to every FD.
Not necessarily. Banks can structure their penalty as specified in their deposit policy. In many cases, the economic impact is reflected through a lower interest payout rather than a separate deduction from the principal. The individual bank’s terms should be checked.
TDS is linked to the interest that is subject to tax and the applicable TDS rules, rather than simply to whether the FD reached maturity. If the bank has deducted TDS, the deduction should be checked against the interest actually reported for the relevant financial year.
Generally, yes. Premature closure does not by itself make FD interest tax-free. Interest earned on a taxable bank FD is generally included in taxable income according to the applicable tax rules.
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
