FD Premature Withdrawal Penalty: Rules, Tax & Math
FD premature withdrawal penalty explained: how banks cut 0.5% to 1% from the rate for the period run, tax and TDS impact, and a worked example with real math.
In this article
- How banks calculate interest when you break an FD
- Typical penalty structures
- Worked example: breaking a 3-year FD after 1 year
- Partial withdrawal: when you need only some of the money
- Tax and TDS on premature withdrawal
- Breaking the FD vs borrowing against it
- FDs under lien: cards and loans
- Before you break an FD
- Key takeaways
Breaking a fixed deposit before maturity usually costs you a penalty of 0.5% to 1% a year, taken off the rate the bank pays for the period your money actually stayed with it. You do not lose your principal, and you normally keep most of the interest. The real cost is often bigger than the penalty itself, because the shorter period usually carries a lower rate to begin with.
How banks calculate interest when you break an FD
RBI rules on deposit interest let each bank set its own premature withdrawal penalty, as long as the bank has a board-approved policy and tells you the terms when you open the deposit. As of October 2026, the method used by almost every bank works in three steps:
- Find the rate for the period completed. The bank looks up the rate it was offering, on the date you opened the FD, for a deposit of the same length as the period your money actually stayed. Many banks use the lower of this rate and your contracted rate.
- Subtract the penalty. Typically 0.5% for smaller deposits and up to 1% for larger ones or longer original tenures.
- Recalculate interest from day one at this reduced rate and pay you the result, minus any interest already paid out to you.
Two rules from RBI's deposit directions also matter:
- Minimum period. If you withdraw before the minimum tenure for an FD, usually 7 days, the bank need not pay any interest.
- Non-callable deposits. Banks can offer "non-callable" FDs that cannot be closed early, at a slightly higher rate. For individuals, this is allowed only on deposits above ₹1 crore. Deposits of ₹1 crore or less must allow premature withdrawal.
Typical penalty structures
Penalties are set bank by bank, so treat the figures below as a general pattern, not a quote for any lender.
| Situation | What usually happens |
|---|---|
| Withdrawn before 7 days | No interest at many banks |
| Retail FD, smaller amount | Rate for period run minus about 0.5% |
| Larger FD or long original tenure | Rate for period run minus up to 1% |
| Closed early to renew for a longer tenure at the same bank | Some banks waive the penalty; check the policy |
| Depositor's death | Nominee or heir can usually close it without penalty |
| Senior citizen deposits | Some banks offer a lower or nil penalty |
| 5-year tax-saving FD | Cannot be closed before 5 years |
| Small finance banks and NBFC/company FDs | Rules vary widely; some have higher penalties or a longer no-withdrawal period |
Your deposit advice or the bank's "terms and conditions for term deposits" page will show the exact penalty. If it is not stated clearly, ask the branch in writing before you break the deposit.
Worked example: breaking a 3-year FD after 1 year
Ananya puts ₹5,00,000 in a 3-year FD at 7.0% a year, compounded quarterly. The figures are illustrative. On the day she opened it, the bank's 1-year rate was 6.5% and its premature withdrawal penalty is 0.5%.
If she holds to maturity: ₹5,00,000 × (1 + 0.07/4)^12 = about ₹6,15,720. Interest over 3 years: ₹1,15,720.
If she breaks it after exactly 1 year:
- Rate for the period run: 6.5%
- Less penalty: 0.5%
- Rate actually paid: 6.0%
- Interest: ₹5,00,000 × [(1 + 0.06/4)^4 − 1] = ₹30,682
What she gives up for that first year:
| Rate applied for year 1 | Interest for 1 year |
|---|---|
| 7.0% (contracted rate) | ₹35,930 |
| 6.5% (1-year rate, no penalty) | ₹33,301 |
| 6.0% (after 0.5% penalty) | ₹30,682 |
So breaking the FD costs her about ₹5,248 compared with earning the contracted rate for that year. Roughly half (₹2,629) comes from the lower 1-year rate and half (₹2,619) from the penalty itself. She also loses the 7% rate on the remaining two years, which matters if rates have fallen since she booked. You can rerun these numbers with your own rate and tenure in the FD calculator.
Partial withdrawal: when you need only some of the money
On a regular FD, many banks close the entire deposit even if you need a small part. Your options:
- Partial withdrawal facility. Some banks allow it on certain FDs. The withdrawn part is treated as prematurely closed, and the rest continues at the original rate.
- Sweep-in or multi-option deposits. Money above a set balance in your savings account moves into an FD, and the bank breaks only the units needed when you withdraw. The penalty applies only to those units.
- Split deposits. Instead of one ₹5 lakh FD, keep five ₹1 lakh FDs. If you need ₹1 lakh, you break one and leave the rest untouched. Staggering the maturity dates turns this into an FD ladder.
Tax and TDS on premature withdrawal
Breaking an FD does not create any special tax. The interest you actually earn is added to your income and taxed at your slab rate, under either the new or the old regime.
- Accrual basis. Many people who file on accrual already paid tax on interest that accrued in earlier years. If the bank then pays less because of premature closure, the difference is reflected in the year of closure. Keep the bank's interest certificate to reconcile this with your Annual Information Statement.
- TDS. From 1 April 2026, TDS on bank deposit interest falls under Section 393 of the Income-tax Act, 2025 (old Section 194A). The rate is 10% with a valid PAN. No TDS is deducted if interest from one bank stays at or below ₹50,000 in the financial year, or ₹1 lakh for senior citizens. These limits apply per bank, across all your deposits.
- Excess TDS. If TDS was deducted on accrued interest that is later reversed, you claim the credit or refund when you file your return.
- Tax-saving FDs. These carry a 5-year lock-in and give a deduction only under the old regime (old Section 80C, now Section 123 of the new Act). They cannot be broken early. For a comparison with other tax-saving options, see PPF vs FD vs ELSS.
Breaking the FD vs borrowing against it
If you need the money for a few months and expect to repay, borrowing against the FD is often cheaper than breaking it.
- Loan or overdraft against FD. Banks usually charge about 1% to 2% above your FD rate. Your FD keeps earning its original rate, so the net cost is only that spread, and only on the amount you use. See loan against FD and mutual funds for how these work.
- Example. Ananya needs ₹3,00,000 for 6 months. An overdraft at 1% above her 7% FD rate costs her roughly ₹3,00,000 × 1% × 6/12 = ₹1,500 net, compared with about ₹5,248 lost by breaking the whole FD after a year.
- When breaking is better. If you will not repay for a long time, or the need is permanent, a loan just adds interest. Break the FD, or only part of it, instead.
FDs under lien: cards and loans
If your FD is pledged as security, you cannot break it freely. This applies to a loan against the FD and to a secured credit card against an FD. The bank must first close the loan or card, or reduce the limit, and then remove the lien. Only after that can you close the FD.
Before you break an FD
- Check the exact penalty in your deposit advice or the bank's published terms.
- Ask whether the bank offers a partial withdrawal or a loan against the deposit.
- Compare the reduced rate with what a fresh FD or other option would pay for the remaining period.
- If rates have risen sharply since you booked, breaking and rebooking can sometimes pay off even after the penalty. Do the math first.
- Make sure the FD is not under lien and that the nominee details are up to date.
Key takeaways
- Banks pay the rate for the period your FD actually ran, minus a penalty of about 0.5% to 1%.
- Withdrawing before the minimum period, usually 7 days, can mean no interest at all.
- Deposits of ₹1 crore or less from individuals must allow premature withdrawal; 5-year tax-saving FDs cannot be broken early.
- Interest earned is taxed at your slab rate, and TDS falls under Section 393 of the Income-tax Act, 2025 (old Section 194A).
- For short needs, a loan or overdraft against the FD often costs far less than breaking it.
Frequently asked questions
What is the penalty for premature withdrawal of an FD?
Most banks charge a penalty of about 0.5% to 1% a year. It is deducted from the interest rate that applied for the period your deposit actually stayed with the bank, not from the rate you originally booked. Each bank publishes its own schedule, so check your deposit advice or the bank's website.
Do I lose all interest if I break an FD early?
No, you normally get interest for the period the money stayed with the bank, at the reduced rate. You lose all interest only if you withdraw before the minimum period, which is usually 7 days for most bank FDs.
Can I withdraw part of my FD without breaking it?
Some banks allow partial withdrawal, and sweep-in or multi-option deposits let you break only the units you need. On a regular FD, many banks close the whole deposit, so splitting money into several smaller FDs gives you more flexibility.
Can a tax-saving FD be withdrawn before 5 years?
No. A 5-year tax-saving FD has a lock-in and cannot be closed early or used as loan security. The only usual exception is on the death of the depositor, when the nominee or legal heir can claim it.
Is it better to break an FD or take a loan against it?
For a short need, a loan or overdraft against the FD often costs less, because banks usually charge 1% to 2% above the FD rate while your FD keeps earning. If you need the money for a long time or will not repay soon, breaking the FD can be simpler and cheaper.
Is TDS deducted when an FD is closed early?
Yes, TDS applies to the interest actually paid or credited, at 10% if your PAN is linked. If total interest from that bank stays below ₹50,000 in the year, or ₹1 lakh for senior citizens, no TDS is deducted, but the interest is still taxable.
This article is for general education and is not personalised financial, tax or legal advice. Rates and rules are as of 21 Oct 2026; confirm current terms with your lender, AMC or a qualified adviser.
