A premature withdrawal penalty is a charge levied by a bank, NBFC, or financial institution when an investor breaks a fixed deposit or bond investment before its scheduled maturity date. In India, banks typically impose a penalty of 0.5% to 1% reduction in the applicable interest rate for the tenure the deposit was held — effectively reducing the interest earned compared to what the investor would have received if they had held a shorter-tenure FD from the start. Some tax-saving FDs (under Section 80C) do not permit premature withdrawal at all during the five-year mandatory lock-in period. For liquid fund investors, premature withdrawal penalties are replaced by exit loads — typically 0.007% for redemptions within one day for overnight and liquid funds. Understanding premature withdrawal terms is critical for investors who may need liquidity before the scheduled maturity of their fixed-income investments.
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