If 5-year post office FD is prematurely withdrawn you will get only savings account interest (2024)

The government has revised the premature withdrawal rules for post office time deposits. As per the new rules, a 5-year post office fixed deposit (FD) cannot be prematurely withdrawn before it completes four years from the date of deposit. Further, if a 5-year post office FD is prematurely withdrawn after it completes 4 years, then only post-office savings account interest will be paid for the entire period that the FD has remained with the post office. Post office time deposit is commonly known as post office FD as well.

This is quite a loss for a post office FD investor. This is because currently, a 5-year post office FD is offering 7.5% per annum. However, if a 5-year post office FD is prematurely broken after it completes 4 years, then post office savings account interest of 4% per annum will be payable. An investor will get 3.5% per annum less interest rate than stipulated rate (7.5% - 4%) because post office FD is broken within 1 year from maturity date.

Also Read: 5-year post office FD cannot be withdrawn before 4 years

Here is an example to understand how much an investor loses when he/she goes for premature withdrawal of a 5-year post office FD after it completes 4 years.

Suppose an individual invests Rs 5 lakh in 5-year post office FD at the interest rate of 7.5% on October 1, 2023. As per post office time deposit rules, interest will be paid out annually to the investor. An investor will receive annual interest of Rs 38,568 which means a total interest in 5 years of Rs 1,92,840. However, due to some emergency the individual decides to prematurely withdraw the post office FD after it has completed four years. The individual will get applicable post office savings account interest (currently 4%). In the example above, an individual will get Rs 1,08,326. An individual will lose interest of Rs 84,514. This leads to a loss of 43.82% or almost 44%.

The good news is that the new rules will be applicable to post office time deposits accounts opened on or after November 10, 2023. For post office FD accounts, opened till November 9, 2023, old premature withdrawal rules will be applicable.

Old premature withdrawal rules for post office time deposit
These old rules would apply to post office FDs opened before November 10, 2023. The old premature withdrawal rules allow breaking of 5-year post office time deposits once it has completed 6 months. Regardless of the tenure, none of the post office FDs can be prematurely withdrawn before completing 6 months from the date of deposit.

A penalty of 2% is applicable if post office FD is prematurely withdrawn after it completes one year but any time before maturity. Hence, if a two-year, three-year or five-year post office FD is prematurely withdrawn before it completes maturity then 2% from the applicable interest rate is deducted. The applicable interest rate will either be one-year, two-year or three years calculated on the basis of completed years.

As per the old rules, "where a deposit in a two-year, three-year or five-year account is withdrawn prematurely after the expiry of one year from the date of deposit, interest on such deposit shall be payable to the account holder for the completed years and months, commencing on the date of deposit and ending with the date of withdrawal, and such interest shall be calculated at the rate which shall be less by two per cent points than the rate specified for a deposit of one-year, two-year or three-year, as the case may be and interest for the completed year shall be calculated on 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 sub-paragraph (b)."

As per the old rules, if the 5-year post office FD is withdrawn after it completes four years, then interest rate on three-year time deposit (prevailing at the time of placing the 5-year FD in question) will be applicable for calculating interest amount payable.

Also Read: Post office FD in old rules can cost you 48% of interest due to premature withdrawal

If the one-year, two-year, three-year and five-year post office FD are prematurely withdrawn after completing six months, then post office savings account interest will be payable for completed months.

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