Does premature withdrawal reduce fixed deposit earnings?

Yes, premature withdrawal before the full term of a fixed deposit (FD) reduces the total earnings on the investment. This happens due to the following reasons:

1. Penalty Charges: Financial institutions impose penalty charges on interest earnings for early FD withdrawals. Depending on the closure period, a penalty may be applicable.
2. Loss of Compounding Benefit: When you keep your money in the FD for the full time, you earn interest on both your original money and the interest already paid (this is called compounding). Taking out money early stops this extra interest from growing.
3. Foregone Promised Returns: FD returns are highest at maturity. Withdrawing early causes loss of returns already committed for longer tenures.
4. Reinvestment Uncertainty: There is uncertainty about whether the withdrawn money can earn similar returns when reinvested in other financial products in volatile scenarios.

Thus, multiple factors like penalty, lost interest, foregone promised yields, etc., lead to a definite reduction in overall gains that would have accrued if the FD was maintained for the full tenure originally opted for by the depositor.

Do keep in mind that while financial institutions may offer the flexibility of loans against fixed deposits, premature withdrawal before the minimum lock-in period of 3 months is generally not permitted and even after that, it significantly reduces your total earnings.