Dear Sir,
This is incontinence of the question asked by Mr Ranjith regarding premature closure of Fixed deposits and calculation of Interest income.
Some banks do not impose penalty but deduct excessive interest paid due to lesser interest rates for the period of premature closure. In which case does it not amount to lesser income .
G.V.Suryanarayana
Visakhapatnam
Ans: Dear Mr. Suryanarayana,
I apologize for not having the details of the earlier question asked by Mr. Ranjith. However, I can provide some general insights into the matter of premature closure of Fixed Deposits (FDs) and the calculation of interest income:
Scenarios for Premature FD Closure
Penalty-Free Premature Withdrawal with Interest Rate Adjustment:
Some banks do not impose a penalty for premature closure but will recalculate the interest based on the rate applicable for the actual period the deposit was held.
For example, if you had a 3-year FD with an interest rate of 6% but you close it after 1 year, the bank will recalculate the interest at the 1-year FD rate, which might be 5%.
This adjustment generally leads to a lower interest income than initially expected because the shorter duration rates are usually lower.
Penalty Imposition:
Other banks may charge a penalty for premature withdrawal. This penalty is typically a percentage of the interest earned or a reduction in the applicable interest rate by a specified percentage.
For instance, if the bank imposes a 1% penalty on a 1-year FD rate of 5%, the effective rate becomes 4%, reducing your interest income.
Impact on Interest Income
Lower Interest Rates: When the bank recalculates interest based on the period the FD was actually held, it almost always results in lower interest income because shorter-term rates are generally lower than longer-term rates.
Penalties: Penalties directly reduce the interest income, either by deducting a percentage of the interest earned or by lowering the applicable interest rate.
Conclusion
In both scenarios, premature closure generally results in lesser interest income compared to holding the FD until maturity. The exact impact depends on whether the bank applies a recalculated rate for the shorter period or imposes a penalty. Both methods are designed to compensate the bank for the early withdrawal and typically reduce the overall interest earnings for the depositor.
If you have any specific cases or examples you'd like to discuss, please provide further details, and I'd be happy to offer more tailored insights.
Best regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
