Prematurely Withdrawal Of 5-year Post Office FD Before 4 Yrs Not Feasible

The Union Finance Ministry recently updated the rules for premature withdrawal of post office fixed deposits, also known as post office time deposits, through a notification issued on 7 November 2023. However, the notification did not clarify what would happen if a depositor wants to withdraw a 5-year post office FD before the completion of 4 years, but after 6 months of opening the account.

India Post, in an email clarification, stated that a 5-year post office FD opened on or after 10 November 2023, cannot be prematurely closed until 4 years have passed from the date of opening the FD. For FDs opened until 9 November 2023, the earlier rules for premature withdrawal are applicable. These rules are explained subsequently. For now, let us understand the new rules.

The updated rules for premature withdrawal of post office FDs are as follows:

a) No post office FD can be withdrawn before 6 months from the date of deposit.

b) A 5-year post office FD cannot be withdrawn before 4 years from the date of opening the FD.

If you withdraw a 1-year, 2-year or 3-year post office fixed deposit (FD) after six months but before one year from the date of deposit, the deposit will earn only post-office savings account interest for that period, which is usually lower.

c) However, if you withdraw a 2-year or 3-year post office FD after completing one year, a penalty of 2 per cent will be deducted from the applicable interest rate on a 1-year or 2-year post office FD, depending on the case. The interest payable will be calculated as follows: Interest rate applicable to the number of years the FD has completed minus 2 per cent. 

d) If you withdraw a 3-year FD after 1 year, then the interest rate applicable to a 1-year FD will be reduced by 2 per cent to arrive at the interest rate payable on the FD that is prematurely broken.

As per the circular, if you withdraw a deposit in a two-year or three-year account prematurely after one year from the date of deposit, interest shall be payable to the account holder for the completed years and months, starting from the date of deposit and ending with the date of withdrawal.

This interest shall be calculated at a rate that is two per cent points less than the rate specified for a deposit of one-year or two-year, as the case may be. Interest for the completed year shall be calculated on a quarterly compounding basis in accordance with the provisions of paragraph 7, and for any part of a year, interest shall be payable as per the provisions of subparagraph (b).

e) In case of 5-year post office FD is withdrawn after completion of just 4 years, the post office savings account interest will be payable.

Old rules for premature

The old rules for premature withdrawal of post office FDs opened on or before 9 November:

a) No post office FD can be withdrawn before the completion of 6 months from the date of deposit.

b) If a 1-year, 2-year, 3-year or 5-year post office FD is withdrawn after 6 months but before 1 year from the date of deposit, then the post office savings account interest will be payable only for the completed months.

c) If a 2-year, 3-year, or 5-year post office FD is withdrawn after 1 year, a penalty of 2 per cent will be deducted from the applicable interest rate on a one-year, two-year or three-year post office FD, as the case may be.

Additionally, the interest payable will be calculated as follows: Interest rate applicable to the number of years the FD has completed minus 2 per cent. For instance, if a 5-year FD is withdrawn after 1 year, then the interest rate applicable to a 1-year FD will be reduced by 2 per cent to arrive at the interest rate payable on the FD that is prematurely broken.

The circular states that if a deposit is withdrawn prematurely from a two-year, three-year or five-year account after one year from the date of deposit, the account holder will receive interest for the completed years and months from the date of deposit until the date of withdrawal.

The interest rate will be two per cent less than the rate specified for a deposit of one-year, two-year or three-year, as the case may be.

Interest for the completed year will be calculated on a quarterly compounding basis according to paragraph 7, and interest for any part of a year shall be payable according to the provisions of subparagraph (b). 

Furthermore, if a 5-year post office FD is closed after four years, the rate of a three-year FD will be applicable.

If you want to invest in a post office FD, you can open an account for 1-year, 2-year, 3-year or 5-year tenures. You can invest a minimum amount of Rs 1,000 and there will be no maximum investment limit.

The government reviews the interest rate on the post office FD schemes every quarter. However, even if the government revises the interest at a subsequent date, your investment gets locked in for the period concerned.

Currently, the interest rate on post office FDs is 6.9 per cent for one year, 7 per cent for two and three years and 7.5 per cent for five years. The interest rate on post office schemes will be reviewed on 31 December 2023.

Unlike bank FDs, a post office FD does not offer differential returns to senior citizens. However, a 5-year post office FD is eligible for a tax benefit under Section 80C of the Income-tax Act, 1961.