Why You Shouldn’t Break Your FD - Do This Instead

Premature Withdrawal FD

Withdrawing from 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 your funds. 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So, unless you invest this withdrawn amount in someplace where you can recover this loss, it is not wise to do so.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:

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 of 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 had 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 also 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.

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:

  *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 of 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 if it is kept for a minimum of one-year or twelve months.

What Should You Do Instead?

There are some alternatives that you can do to avoid breaking an FD while taking care of your immediate 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.

When Breaking or Withdrawing an FD Profitable?

If you find an investment option that offers you a higher return than 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 the 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 opened your FD account.

Conclusion

Since fixed deposits are one of the best investment options, 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.