Why Should You Not Break Your FD? Instead, Do This

FDs or fixed deposits are also known as Term Deposits as they are opened for a specific tenure/ term, which may range from seven days to 10 years. While most of us complete the tenure for which we have taken our FD, but some of us may withdrawing it prematurely because of many reasons. Withdrawing an FD before it matures is known as breaking it.

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Even though withdrawing an FD can fulfill our short-term financial needs, but doing so is not a good idea. This is because when you do the same, you lose money. In addition to this, an unplanned FD withdrawal can invite a penalty, which is generally around 1% of the principal amount, however, this rate can vary from bank to bank.

An example to understand this can be: suppose, you have invested Rs. 1,00,000 in an FD for a tenure of 10 years. The amount that you may get as maturity from this investment is Rs. 1,93,974. Now imagine, you decide to withdraw the money that you have invested after four years. The interest rate that you get for this tenure is 6.8%. This is the rate that you will get with a penalty of 1%, i.e. the interest that you will get is around 6.8-1 = 5.8%. So, the final maturity amount that you will get in this case will be Rs. 1,25,297. Therefore, in this case, you lose a total of Rs 68,677.

So, unless you invest this withdrawn amount to someplace where you recover this loss, it is not wise to do so. Instead, there are some other things you can do that are discussed below, but before that let us see the losses that you encounter in case of breaking an FD:

Comparison Between
Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund
Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund
Guaranteed Return Plans
Returns Before Tax
7.5% (TAX-FREE)
Returns After Tax
7.5%
Guaranteed Returns
Yes
Life Cover
Yes
Tax on Profit
Tax Free*
Risk
No Risk
awards
Still Better than FD’s and Debt Mutual Fund
Fixed Deposits
Returns Before Tax
7% (TAXABLE)
Returns After Tax
4.8%
Guaranteed Returns
Yes
Life Cover
No
Tax on Profit
Taxable
Risk
Low Risk
Debt Mutual Fund
Returns Before Tax
8% (TAXABLE)
Returns After Tax
5.5%
Guaranteed Returns
No
Life Cover
No
Tax on Profit
Taxable
Risk
High Risk
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Effects of Breaking a Fixed Deposit:

  • Lower Rate of Interest: When you withdraw your Fixed Deposit, you get a lower interest rate and as well as pay the penalty for withdrawing it prematurely. For example, you opened a fixed deposit account for a year with a rate of interest of 7.5%. However, if you decide to withdraw it before completing the tenure, say in 10 months, then the interest that you earn will be reduced by 1%. This reduced rate o FD will be applicable from the start of the tenure of this FD. So, resultantly you will get a reduced return on your FD than what you have planned initially.

  • Penalty: With a reduced rate of interest, you are also required to pay a penalty. This penalty may range from 0.50% to 1% additional to the interest. The fixed deposits that have the facility of sweep-in and periodic pay-out are as well charged a penalty at the time of premature withdrawal. Therefore, while breaking a fixed deposit, you will not only be charged a reduced rate of interest but a penalty. This all drastically lowers the returns of your fixed deposit investment.

fd return beater

Penalty Rates of Different Banks:

Different banks have different penalty rates that are deducted from the rate of interest that is applicable, some of these penalty rates are mentioned below:

Name of the Bank Rate of Penalty
Axis Bank 1%
Bank of Baroda 1%***
Bank of India 1%
Canara Bank 1%**
HDFC Bank 1%
ICICI Bank Up to 1.50%*
IDBI Bank 1%
Punjab National Bank 1%
State Bank of India 1%
Union Bank None

 *0.50% rate of penalty is levied for a tenure of less than a year, 1% is applied for more than one year, and if the deposit is not more than Rs.5 Crore. For the deposits that are above Rs. 5 Crore, 1% for the tenure for up to five years, and 1.50% for five years and more.
**Penalty is applicable for deposits that are less than Rs. 1 Crore.
***Penalty is not applicable when the deposited amount is less than Rs. 5 Lakhs are if it is kept for a minimum of one-year or twelve months.

You may like to Read: ICICI Bank FD Rates

What Should You Do Instead?

There are some alternatives that you can do to avoid breaking an FD while taking care of your instant requirements. These alternatives are:

  • You can take short-term liquidity by opting for a loan against your Fixed Deposit account. The maximum loan that you can take against your FD is 90% of your invested amount. The rate of interest for this loan is most of the time lower than a regular loan rate. Since your FD amount serves as collateral, your credit score is not considered.

  • Instead of opening one fixed deposit account for a huge amount, you can break it into small amounts and go for different fixed deposits from it. By doing this, you do not have to rely on one deposit only. If you need a smaller amount than the amount of your FD, then you do not have to break a full FD instead you can break a smaller one.

FD interest rates India have fallen consistently over the last 12 years.
Invest in Plans that offer Guaranteed Returns for over 25 Years

When Breaking or Withdrawing an FD Profitable?

If you find out an investment option that offers you a higher return as compared to the interest rate of your fixed deposit, it is worth breaking your fixed deposit. For the same, do the mathematics and find out if the return from the new option for investment is significantly higher than the return of FD. If you have to break your FD, then you should do it when it is relatively newer. This can be after a few months from the date you have opened your FD account.

The Final Words!

Since fixed deposits are one of the best investment options, however, you must avoid breaking your FD. This is because when you break it, you will not only get a reduced rate of interest but you will also have to pay the penalty. You can consider the aforementioned points to avoid breaking your fixed deposit account. If you avoid breaking your FD, you can make a lot more money than you can get when you break it prematurely. So, be wise and take an appropriate decision.

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