Exiting a fixed deposit before maturity usually incurs penalties, reducing your interest earnings. The bank may charge a premature withdrawal fee and offer lower interest rates, impacting overall returns. This makes early withdrawal less financially favorable compared to holding the fixed deposit until maturity.

Here's an example for your reference.

  • Suppose, you've Invested  ₹10K, for 3 years at 8%.
  • 2 years later, you decide to break your FD for an emergency.
  • Bank will now consider the Interest for the duration your FD was active, which may be lesser than 8%. Say the 2 year FD rate at the time of early exit is 6%.
  • On top of this, bank will also deduct Early exit penalty (if any). Most banks charge around 1% as early exit penalty.
  • So, the effective Interest rate for your FD will now be 6% (2 year rate) - 1% (Early exit penalty) = 5%
If you're an opportunist, you may think that you can earn 9% in a scenario where the 2-year FD rate is 10%. To handle this scenario, the bank will now consider the difference between the actual rate and the interest penalty, which is 7% (8% - 1%).

Here's the math:

Interest paid at 8% for 2 years = ₹10K * 8% * 2 years = ₹1,600
Revised interest at 5% for 2 years = ₹10K * 5% * 2 years = ₹1,000
  • Scenario-1: If the bank hasn't paid any Interest to you till date, you will receive on settlement will be ~₹11,000 (₹10,000 + ₹1,000)
  • Scenario-2: If the bank anything more than ₹1,000, they will recover the excess amount during the early exit settlement. Suppose, the bank already paid ₹1,600 to you, the amount you'll receive on settlement will be ~₹9,400 (₹10,000 - ₹600), since bank paid ₹600 in excess.

Note: 

  1. The calculation is for explanatory purposes, and actual results may vary due to TDS deductions or differences in how banks calculate interest payments.
  2. NBFCs like Bajaj, Shriram and Mahindra Finance won't pay Interest If you exit between 3 to 6 months, even when the lock-in is for 3 months