The example in the FAQ about premature withdrawal is potentially confusing:
“For example, if you invested ₹1 lakh for 1 year at 7% and withdrew after 6 months, applicable interest for 6 months at 7% = ₹3,500. With 1% penalty, new rate = 6%, so interest you’ll receive = ₹3,000.”
From this example, it appears that the original FD rate (7%) continues to apply even when the FD is withdrawn after 6 months, with only a 1% penalty deducted.
However, based on the banks’ premature withdrawal policies, the applicable rate is generally the rate corresponding to the actual period the deposit remained with the bank, minus the penalty. Since shorter-tenure FDs often have lower interest rates than longer-tenure FDs, the example can give readers the impression that they would receive the original FD rate minus 1%, regardless of when they withdraw.
To make this clearer, I would suggest using an example where the rate applicable for the actual holding period is different from the original FD rate. For example:
- Original FD: 1 year at 7%
- Withdrawn after 6 months
- Applicable 6-month rate: 5%
- Premature withdrawal penalty: 1%
- Effective rate paid: 4%
This would better illustrate how the premature withdrawal calculation works and reduce the possibility of misinterpretation.