Exiting a Fixed Deposit (FD) before maturity usually incurs penalties, which can reduce your interest earnings. Banks may charge a premature withdrawal fee and apply a lower interest rate, making early withdrawals financially less favorable than holding the FD until maturity.

How Premature FD withdrawal works?

• If you break your FD early, the bank will apply the interest rate applicable for the actual tenure your FD was active, which may be lower than the originally agreed rate.
• An early exit penalty (usually 1%) is deducted from the applicable interest rate.

Example Calculation: Let’s say you invested ₹10,000 for 3 years at an 8% interest rate. However, after 2 years, you decide to withdraw the FD early.

1. Revised Interest Rate:

• The applicable 2-year FD rate at the time of withdrawal = 6%
• Early exit penalty = 1%
• Effective Interest Rate = 6% - 1% = 5%

2. Interest Calculation:

• Original Interest (8% for 2 years) → ₹10,000 × 8% × 2 = ₹1,600
• Revised Interest (5% for 2 years) → ₹10,000 × 5% × 2 = ₹1,000

3. Final Settlement Amount:

• Scenario 1 (If no interest has been paid so far): You will receive ₹11,000 (₹10,000 principal + ₹1,000 interest).
• Scenario 2 (If the bank already paid ₹1,600 in interest): The bank will recover the excess ₹600, and you will receive ₹9,400 (₹10,000 - ₹600).

Important Notes:

• The above example is for explanatory purposes; actual payouts may vary due to TDS deductions and bank-specific interest calculations.
  

• NBFCs (e.g., Bajaj, Shriram, Mahindra Finance) may have stricter policies, where exiting an FD between 3 to 6 months may result in no interest payout, even if the lock-in period is just 3 months.