Bank Deposit rate:
Interest rate for 90 days is 4.5%
Interest rate for 365 days is 6%
Lets say I am depositing money Rs 10000 in a ICICI linked fixed deposit with no premature withdrawal penalty for 12 months. I select 12 month while creating the deposit, bank promises 6 % interest rate.
If i withdraw at 90 days will i get interest of 10000 x 0.06/365 x 90 = Rs 147.9
or
10000x 0.045/365 x90 = Rs 110.9
I am guessing 110 if not everyone would choose the highest tenure and break when needed. But I dont think banks offer FDs without pre mature penalties.
Rs 110.9 (applicable interest rate will be 4.5% p.a.)
Upon premature withdrawal of FDs,
most banks have this “standard” where
a. the interest-rate applied will be for the actual period of deposit (not the initial planned longer period)
b. an additional penalty (usually 1 percent) will be applied, and the interest-rate reduced.
In addition,
some banks have a clause that upon premature-withdrawals,
the bank can choose to decide the interest-rates to be applied between
either the rates available during initial opening of the FD
or the rates available at the time of premature-withdrawal.
(obviously they will choose whichever is lower)
Basically, banks want to
eliminate any potential incentives to initiate a premature withdrawal for the individuals opening FDs,
and also reduce the ability of individuals opening FDs to “game the system” by premature withdrawal of FDs when interest-rates inevitably change over time
In this case,
a. the interest-rate of 90 days will be applied.
b. the bank promised to waive-off any premature withdrawal penalty (for upto 12 months).
I haven’t seen her posts for at least last 3 months. Not sure if she is active any longer.