The Finance Ministry revised the premature withdrawal rules for post office fixed deposits (also known as post office time deposits) via a notification dated November 7, 2023. However, the notification is silent on what will happen if a depositor wants to prematurely withdraw a 5-year post office FD after 6 months but before 4 years.
According to an email clarification by India Post, a 5-year post office FD opened on or after November 10, 2023, cannot be prematurely closed until 4 years have passed from the date of opening of the FD. For FDs opened till November 9, 2023, the earlier rules are applicable for premature withdrawal. These rules are explained subsequently. But for now, let us understand the new rules.
New rules notified for premature withdrawal of post office FDs
The government revised the premature withdrawal rules for post office FDs of various tenures. The new rules are as follows:
a) No post office FD can be withdrawn before 6 months from the date of deposit and 5-year post office FD cannot be withdrawn before completion of 4 years.
b) If a 1-year, 2-year or 3-year post office FD is withdrawn after 6 months but before one year from the date of deposit, the deposit will earn only post-office savings account interest for the period (which is usually lower).
c) If a 2-year or a 3-year post office FD is prematurely withdrawn after one year, a penalty of 2% will be deducted from the applicable interest rate on a 1-year or a 2-year post office FD, as the case may be. The interest payable will be calculated as follows: Interest rate applicable to the number of years the FD has completed minus 2%. For example, if a 3-year FD is withdrawn after 1 year then the interest rate applicable to a 1-year FD will be reduced by 2% to arrive at the interest rate payable on the prematurely broken FD.
The circular states as follows: where a deposit in a two-year or three-year account is withdrawn prematurely after the expiry of one year from the date of deposit, interest on such deposit shall be payable to the account holder for the completed years and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 or two-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);
d) If a 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 withdrawal of post office FD
The old rules for premature withdrawal of post office FDs opened on or before November 9:
a) No post office FD can be withdrawn before the expiry 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 one year from the date of deposit, then the post office savings account interest will be payable 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% will be deducted from the applicable interest rate on a 1-year, 2-year or 3-year post office FD, as the case may be. Here also the interest payable will be calculated as follows: Interest rate applicable to the number of years the FD has completed minus 2%. For example, 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% to arrive at the interest rate payable on the prematurely broken FD.
The circular states as follows: 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);
d) If a 5-year post office FD is closed after four years, the rate of a three-year FD will be applicable.
Features of post office FD
An individual can invest in post office FD by opening an account for either 1-year, 2-year, 3-year or 5-year tenures. The minimum investment is Rs 1,000 and there is no maximum investment amount.
The interest rate on the post office FD schemes is reviewed by the government every quarter. However, an investment gets locked in for the period concerned even if the government revises the interest at a subsequent date.
Currently, the post office offers 6.9% for one-year FDs, 7% for two- and three-year FDs and 7.5% for five-year FDs. The interest rate on post office schemes is due for review on December 31, 2023.
Unlike a bank FD, a post office FD does not offer differential returns to a senior citizen. Further, a 5-year post office FD is eligible for a tax benefit under Section 80C of the Income-tax Act, 1961.
