Easy exit: Best FDs with no withdrawal penalty
Three banks offering among the highest interest rates allow you to withdraw prematurely at no penalty, while others offer lower rates and levy a fine. Is your FD in the right place?
When the going gets volatile, as they have been for about five years now, we all look to the trusty fixed deposit (FD). It’s safe, insured and rates are still on the high side, even if it isn’t tax efficient. It’s likely that you’ve invested a lot of your savings in FDs over the past five years. It’s even more likely that you arbitrarily picked the term. After all, it’s not easy to ascertain when you’d need the money. Perhaps you figured that you would pay the withdrawal charges if you had to. The charge is usually a 1% reduction in the interest rate, a small penalty if you really need the money, but completely unnecessary if you pick the right bank to deposit your money in.
An FD is almost effortless investment. All you really need to do is hunt for the best possible rate at the banks it’s most feasible for you to invest in and check the premature withdrawal penalty. Yet, we don’t do this. Currently, there’s a wide disparity in interest rates offered by even the major banks. For example, ICICI Bank is offering a rate of just 7.5% for a term of one year, HDFC Bank is offering 8%, while ING Vysya is offering a whopping 9.25% for the same term. If you invested Rs5 lakh in the latter, you’d earn nearly Rs10,000 more than you’d earn with ICICI Bank. Banks do state that they need you to open an account in their bank to start an FD, which you may find unacceptable, but this is usually escapable. If you’re firm, even a public sector bank is likely to budge; private banks do so all the time. So there’s much to gain from a bit of research. There’s also much to lose from doing only half your research, if you don’t pay attention to withdrawal penalties.
From the rates mentioned above, you may assume that ING Vysya’s rate is high, so there must be a catch. But, surprisingly, it is the bank that has no withdrawal penalty, despite offering the high rate of 9.25%, while both ICICI Bank and HDFC Bank offer lower rates and levy withdrawal penalties of 1% on the rate of interest if you withdraw prematurely. This is also the case with Laxmi Vilas Bank, which offers rates even higher than ING Vysya, at 9.4%, but has no withdrawal penalty. Also, if you believe that public sector banks don’t levy such penalties, you’re wrong. Both Bank of Baroda and State Bank of India have penalties, of 1% and 0.5%, respectively.
How the penalty is calculated
All withdrawals could have a cost, even if there is no withdrawal penalty. Let’s understand this with the following example: if you lock your money into a fixed deposit offering an interest rate of 9% for one year, but wish to withdraw your money six months later, you shall receive the money at the rate applicable to six-month deposits (which is usually lower), not one-year deposits. Now that this is clear, we can understand fully well how the penalty is calculated. We’ll use ING Vysya, which levies no premature withdrawal penalties, and HDFC Bank, which does levy a 1% penalty, as examples.
|Bank||Deposit||2-year rate||Maturity value||Withdrawal (1-year rate-penalty)||Maturity value|
|ING Vysya||Rs5 lakh||9.25%||Rs596,778||9.25%-Nil||Rs5,35,000|
|HDFC Bank||Rs5 lakh||8.75%||Rs591,328||8%-1%||Rs5,46,250|
You may also be wondering what would happen if the interest rate for a shorter period is higher than for a longer period. Generally, banks give a slightly lower rate for five-year deposits, particularly because they also give tax deductions. HDFC Bank’s rate, for example, drops to 8.25% from 8.75% for two-year deposits. In this case, some banks, including HDFC Bank and State Bank of India, would pay out interest at the lower rate, not the higher rate, even after penalising you for the premature withdrawal. This practice is not followed by many banks, though, including ICICI Bank, Axis Bank and Bank of Baroda.
Finally, let’s look at interest rates on offer. Here you’ll find that three banks, ING Vysya, Karur Vysya Bank and Laxmi Vilas Bank, are offering very high rates, while not charging any premature withdrawal penalty.
|Bank||1 year||2 years||5 years||Penalty|
|Karur Vysya Bank||9.5%||9.5%||9%||None|
|Laxmi Vilas Bank||9.5%||9%||9%||None|
|Catholic Syrian Bank||9.35%||8.75%||8.75%||1%|
|ING Vysya Bank||9.25%||9.25%||8.5%||None|
|Punjab National Bank||9%||8.75%||8.75%||1%|
|Bank of Baroda||8.75%||8.75%||8.75%||1%|
|State Bank of India||8.75%||8.75%||8.75%||0.5%|