Fixed deposit interest rates are seeing a monstrous rise in the recent times. Major lenders like State Bank of India, Punjab National Bank, HDFC Bank are just a few names in the list which is presently encompassing almost every bank of the country. The continuing rate war amongst banks tends to tempt the customer towards the attractive rates being offered. However how viable is it to close a FD before maturity and move towards a new one with better rates is a question needing analysis.
The most important factor which accompanies premature withdrawal of a fixed deposit is preclosure penalty. Usually a penalty in the range of 0.5 -2% is levied by banks in case of premature withdrawal of all fixed deposits. The penalty is charged because FD termination causes an asset liability mismatch in the book of accounts of banks which needs to be managed.
Some banks however waive off the penalty in case the customer renews his FD with the bank or opens a new one of higher amount with it. This way banks try to retain old customers while allowing them to avail higher interest rates too.
There are certain other cases also when banks waive off this penalty but no bank gives a specific list of such instances. In case of serious illness or death of a member of family, banks tend to waive off the penalty but it needs them to be seriously convinced of the genuineness of the customer's decision of premature withdrawal.
Apart from the penalty clause, the customer also needs to look into the time frame where the current FD lies from maturity before deciding to close it. In case the FD is nearing maturity in a short time, it won't be considered very wise to close it off for a higher rate deposit too. This is because along with penalty the interest income generated from the old FD will also decrease, thereby bringing down the expected gains from the new deposit offering higher interest rate.