Break a fixed deposit early and you lose twice. First, the bank re-prices the whole deposit. You get the rate that applied to the period the money actually stayed, not the rate you were promised. Second, a penalty is deducted from that lower rate. Both losses apply to the entire tenure, not only to the months you cut short.
The re-pricing rule is not a bank policy. It is regulation. The RBI’s Master Direction on Interest Rate on Deposits, clause 7(b)(1), says interest “shall be paid at the rate applicable to the amount and period for which the deposit remained with the bank and not at the contracted rate”. The direction was last updated on 7 June 2024.
What are the rules on breaking an FD early?
| Rule | What it means for you | Applies to | Source |
|---|---|---|---|
| Interest is recomputed | You earn the card rate for the period actually run, not the booked rate | All term deposits | RBI Master Direction, clause 7(b)(1) |
| A penalty may be levied | Deducted from the recomputed rate, under a board-approved policy | All term deposits | RBI Master Direction, clause 14(a) |
| Penalty must be disclosed upfront | If it was not shown to you at booking, no penalty can be charged | All term deposits | RBI Master Direction, clause 14(b) |
| Premature withdrawal must be offered | Deposits from individuals of ₹1 crore and below must be breakable | Individuals, single or joint | RBI Master Direction, clause 7(a)(iii) |
| No penalty on a deceased depositor’s split | Claimants can split the deposit penalty-free if period and total do not change | Deceased depositor claims | RBI Master Direction, clause 14(c) |
Source: RBI Master Direction — Reserve Bank of India (Interest Rate on Deposits) Directions, 2016, as updated 7 June 2024.
Why there is no penalty table by bank on this page
Because there is no fixed, regulated penalty to tabulate. Clause 14(a) requires each bank’s board to approve its own policy. Banks change that policy. Many run different penalties by tenure, by deposit size and by channel. A table copied once and left to rot would be worse than no table.
Do this instead. Open your bank’s schedule of charges or its term-deposit page and search for “premature”. Then check your own deposit advice. Clause 14(b) is your protection here. If the penalty was not brought to your notice when the deposit was accepted, it cannot be levied. Ask for it in writing before you agree to any deduction.
How much do you actually lose? Work the arithmetic
The formula is short. Take the bank’s card rate for the period your money stayed. Subtract the penalty. Apply that net rate to the full period. Compare it with what you would have earned by waiting.
Here is an illustration. The rates below are assumptions, not published figures. Substitute your own bank’s card rates before deciding anything.
| Scenario | Assumed rates | Effective rate paid | Roughly what it costs |
|---|---|---|---|
| ₹5,00,000 booked for 5 years, broken at 1 year | Booked 7.00%; 1-year card rate 6.50%; penalty 1.00% | 5.50% | ₹7,500 of interest given up for that year |
| Same deposit, broken at 4 years 11 months | Booked 7.00%; 4-year card rate 6.75%; penalty 1.00% | 5.75% | About ₹61,000 given up across the full term |
Illustration only. The pattern is the lesson. Breaking a deposit near the end costs far more in rupees than breaking one near the start. The recomputation reaches back over every year you held it.
When does breaking an FD still make sense?
Three cases, and in our view only three.
Rates have risen sharply. If the current rate for your remaining tenure beats your booked rate by more than the penalty and the recomputation cost, switching is rational. Do the sum first. Compare against current FD rates before you touch anything.
You need the money and the alternative is worse. A personal loan or a revolving credit card balance costs far more than any FD penalty. Break the deposit.
You are over the deposit insurance limit at one bank. DICGC cover is ₹5 lakh per depositor per bank, and it covers principal plus interest. If you sit well above that at a single small bank, moving money is a risk decision, not a return decision. This matters most with the higher-paying small finance bank deposits.
The cheaper option most people miss
You do not always have to break the deposit. Two alternatives exist.
A loan or overdraft against the FD lets the deposit keep running. Banks price it as your FD rate plus a spread. You pay the spread and keep the contracted rate. When you only need money for a few months, this is usually cheaper than breaking. Compare the spread you pay against the interest you would forfeit.
Partial withdrawal is the other. Many banks let you break part of a deposit and leave the rest running at the original rate. Ask for that before you close the whole thing. It is rarely offered unprompted.
Two traps on the way out
Tax does not reverse. TDS already deducted on accrued interest stays deducted. You claim it back only when you file. Under section 194A a bank deducts 10% once interest crosses ₹50,000 in a year, or ₹1,00,000 for a senior citizen.
Tax-saver FDs cannot be broken at all. The five-year lock-in is a condition of the deduction. There is no penalty route out. Treat that money as gone until maturity — see tax-saver FDs. Senior citizens weighing a switch should check senior citizen FD rates first.
Frequently asked questions
Do I lose all my interest if I break an FD early?
No. You lose the difference between your booked rate and the bank’s card rate for the period actually run, plus the penalty. If the deposit has run for a very short period, some banks pay no interest at all below their minimum tenure, usually seven days. Check your bank’s policy for that floor.
Can a bank refuse to let me break my FD?
Not on a deposit of ₹1 crore or below held by an individual. Clause 7(a)(iii) of the RBI Master Direction requires those to carry a premature-withdrawal facility. Above ₹1 crore, banks may offer non-callable deposits that genuinely cannot be broken, usually at a higher rate. Read the product name before booking.
Is the penalty charged on the interest or on the principal?
On the rate. The penalty is a reduction in the interest rate applied, expressed in percentage points. Your principal is never touched. So the rupee cost rises with both the deposit size and the time it ran.
What happens to an FD if the depositor dies?
Claimants can take the money out early. Where the deposit is split between claimants, clause 14(c) says no premature withdrawal penalty applies, provided the period and the aggregate amount do not change. Cite that clause if a branch tries to charge one.
Should I break my FD to invest in something with a higher return?
Usually not, and be honest about why you are asking. The loss is certain and immediate. The higher return is a forecast. If the FD is your emergency money, it is doing its job by being boring. If it is long-horizon money sitting in a deposit by accident, that is a different conversation — and one to have at maturity, not mid-term.
Sources
- Reserve Bank of India, Master Direction — Interest Rate on Deposits Directions, 2016, updated 7 June 2024 — rbi.org.in (primary)
- DICGC cover of ₹5 lakh per depositor per bank, and the section 194A TDS thresholds, as held in Credsir’s rate and tax data, as of 15 August 2026.
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