Post office time deposit premature withdrawal can cost you 48% of the interest (2024)

Mrs A invest Rs 5 lakh in 5-year post office time deposits (POTD) on April 1, 2021 at rate of 6.7% per annum. She will receive annual interest of Rs 34,351 every year for the next five years. However, after the completion of three years (say on April 2, 2024), she breaks her POTD to meet financial emergency. Due to premature withdrawal, she receives Rs 4,50,140 from the post office. She faces an interest loss of 48%, as per current rules. The interest loss is also very heavy in case of premature withdrawal of post office time deposits of other tenures. In general, the loss in these cases is much more than in the case of premature withdrawal of fixed deposits with banks.

Here is how the loss of 48% mentioned above happened. Till the completion of three years of the deposit tenure, Mrs A was paid Rs 34,351 every year at the interest rate of 6.7% per annum. However, as she broke her POTD she was supposed to receive Rs 17,351 at the interest rate of 3.5% per annum. The excess interest Rs 49,860 [Rs 1,03,053 (Rs 34,351 X 3) - Rs 53,193 (Rs 17,731 X 3) paid to her in the past three years was recovered from the principal amount of Rs 5 lakh.

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POTDs offer sovereign guarantee and a higher interest rate as compared to bank fixed deposits. However, this comes at a much higher cost of liquidity which most people are not fully aware of. Where banks usually charge a penalty of 0.50-1% for premature withdrawals, for POTD the charge will be much higher as it will depend on how long you have stayed invested. Here is a look at how premature withdrawal works in case of POTDs, the cost of withdrawing prematurely from POTD vis a vis that of bank FDs.

Premature withdrawal rules for post office time deposits (POTD)
POTD is available in four investment tenures: 1 year, 2 years, 3 years and 5 years. Do keep in mind that premature withdrawal is not allowed from POTD before the expiry of six months, regardless of the tenure. This is different from a bank fixed deposit where it can be prematurely withdrawn the very next day.

Here is a look at the current premature withdrawal rules for each tenure of POTD.

• Five-year POTD

The amount of money you will receive in case of premature withdrawal from a five-year POTD depends on how long you have held it.

If withdrawn after completion of four years
If the five-year time deposit is closed after the completion of four years from the date of deposit, then the interest payable to you on that deposit would be equal to that payable on three-year time deposits at the time the five-year TD was originally opened. This is similar to how interest rate on premature withdrawal of bank FDs is calculated.

Further, if the time deposit has also completed some months beyond four years, then only post office savings account interest will be paid for the completed months.

Effective from April 1, 2021, three-year time deposit is offering 5.5% and a five-year POTD is earning 6.7% per annum, which would mean a loss of 1.2% in the above situation.

Suppose you have invested Rs 1 lakh in a 5-year time deposit on April 1, 2021 and you go for premature withdrawal on May 31, 2025. Here the time deposit has completed four years and two months. The interest will be paid as follows:

3-year interest rate will be paid on the completed four years, which is 5.5%, as on April 1, 2021 . The amount payable will be Rs 1,24,421.05. Further, the FD has been held for two months beyond four years. On those two months, PO savings account interest at the rate of 4% annually will be paid. The additional interest for these 2 months will be Rs 829.47. The total amount payable to you will be Rs 1,25,250.53. Had the time deposit run for five years, the final amount payable would have been Rs 1,39,406.69. Thus, in case of premature withdrawal, an investor bears a loss of Rs14,156.16.

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If withdrawn after completion of one year but before four years
If the five-year deposit is withdrawn after the completion of one year but any time before four years, then the interest paid on premature withdrawal will be 2% less than the rate specified for a deposit of one-year, two-year or three-years, as the case may be.

Here is how the interest will be paid in case a 5- year post office time deposit is prematurely encashed after holding for one year but before completion of four years:
a) Completed one year but less than two-years: 1 year interest rate minus 2% (Currently 3.5% (5.5-2%))
b) Completed two years but less than three-years: 2-year interest rate minus 2% (Currently 3.5% (5.5-2%))
c) Completed three years but less than four-years: 3-year interest rate minus 2% (Currently 3.5% (5.5-2%))

Note that in all the cases a, b and c, as on April 1, 2021, the interest paid would be even less than the current savings account rate of 4%. Which means that you would have earned more if you had left the money in your post office savings account in these cases.

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However, let us say you prematurely withdraw a 5-year PO time deposit after completion of three years and 3 months, how will the penalty be calculated? In this case, post office savings account interest (4% annually for the quarter ending September 30, 2021) will be paid for the completed three months, and 3-year interest rate minus 2% will be paid on the completed three years.

If withdrawn after completion of six months but before one-year
If the 5-year time deposit is prematurely withdrawn after the completion of six months but before 1 year, then post office savings account interest will be paid. Currently, 5-year post office is offering 6.7% and post office savings account is offering 4% annually, thus a loss of 2.7%.

• 2-year and 3-year post office time deposit

The premature withdrawal rules in case of 2-year and 3-year post office time deposit are similar to the rules that apply to a 5-year time deposit in case the 5-year POTD has completed less than 4 years.

• In case of premature withdrawal of a 2-year POTD after the completion of one year, the 2-year time deposit will fetch interest rate of 1-year post office time deposit minus 2%.
• In case of 3-year time deposit, if the deposit has completed 1-year but less than 2 years then the applicable interest rate will be 1-year post office time deposit rate minus 2%.
• If the 3-year time deposit has completed 2 years, then the applicable interest rate will be 2-year time deposit minus 2%.

Post office savings account interest rate will be paid on the number of months completed over and above the completed years. Further, if the time deposit is broken before the completion of 1-year (but after 6 months), then post office savings account will be paid for the time period the time deposit is held.

• 1-year post office time deposit

Post office savings account rate will be applicable in case a 1-year post office time deposit is prematurely encashed after the completion of six months.

Premature withdrawal rules for bank FDs
Each bank has its own policy related to rules and penalty in case of premature withdrawal of a bank fixed deposit (FD). Usually, banks charge penalty of 0.50% to 1% for premature withdrawals. According to the State Bank of India's (SBI) website, the bank charges 0.50% for FDs up to Rs 5 lakh and 1% for FDs above Rs 5 lakh. HDFC Bank charges penalty of 1% on applicable rate in case of premature withdrawals, as per the bank's website.

Normally, in case of premature withdrawal of a bank FD, the interest rate for the tenure that the FD has actually remained with the bank (as against the rate for the tenure the FD was originally placed for) minus the penalty amount is payable. Click here to read more about it

It is to be noted that at times a bank may waive penalty on premature withdrawals too as part of its general policy review.

Premature withdrawal of POTD vs bank FD: Where do you lose more money?
To know where you lose money more in case of premature withdrawals, we have taken an example to do a comparative analysis.

Assumptions made:

• Investment amount: Rs 1 lakh
• Date of Investment: April 1, 2021
• Penalty of 0.50% is applicable on premature withdrawal of bank FD
• SBI FD rates are taken for the purpose of bank FD
• Interest rates for both bank FD and POTD are taken as on July 13, 2021
• For bank FD premature withdrawal, it is assumed that the interest rate applicable for the tenure it is actually held is as on July 13, 2021 less of penalty of 0.50%
• The applicable bank FD rates remain unchanged till premature liquidation.

The table below shows the amount that the depositor would get if he prematurely withdraws the Rs 1 lakh fixed deposit after various time periods.

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As it can be seen from the table above, in case of premature withdrawal, in three of the situations taken above an individual will lose significantly more money in POTD as compared to bank FD. Only if a 5-year POTD is withdrawn after the completion of four years, then the individual loses significantly more money in case of a bank FD. In the case of withdrawal at 9 months the bank FD will give a minor amount of Rs 47 less than the POTD.

The results in the above table will vary from bank to bank and also over time. However, as per current rules, in majority of the cases the loss on premature withdrawal of POTDs is likely to be higher because of the higher penalty of 2% imposed on premature withdrawal of these.

Therefore, do your maths carefully before prematurely breaking your post office time deposit.

(Graphics by Sadhana Saxena/ET Prime)