Breaking Your FD Early: Penalties and Alternatives

In this blog, we will discuss the consequences of breaking your FD early and alternative ways to prevent those hefty penalties.

Meaning of premature withdrawal of FD

When you invest your money in an FD, you agree to deposit a specific amount for a fixed period upon the agreed interest rate. However, occasionally, circumstances may force you to choose a different route, and you may need to access that money earlier than anticipated. So, when you take out money before it’s due, it is termed premature withdrawal of FD.

What happens when you break your FD early?

1. Loss of money due to penalties:

The bank will impose penalties if you withdraw funds from a fixed deposit before the term is set to expire. Because you didn’t stick to the original plan and leave your money in the bank for the whole period, you will receive less money than you anticipated.

2. Loss of interest:

When you withdraw your FD early, the interest computation is often altered. This implies you may lose some of the interest you would have earned had you held the deposit until maturity.

3. Revision of tax:

Banks deduct tax at source (TDS) on the fixed deposit interest. When you withdraw your deposit before maturity, the TDS is modified to reflect the reduced interest rate that applies to premature withdrawals. This means that the TDS amount may be revised.

4. Impact on loan eligibility:

FDs are frequently used as collateral to secure loans. If you withdraw your FD prematurely, it may affect your eligibility for future loans. Banks assess your creditworthiness based on various criteria, including your financial stability. A history of early withdrawals may raise worries about your capacity to handle financial commitments.

What is the penalty for breaking your FD early?

Banks charge a penalty when you decide to take your money out of a fixed deposit before maturity. This penalty typically varies between 0.5% and 1.0% of the interest you would have received, reducing the money you receive back.

Are there ways to avoid the penalty?

1. Can take a loan against FD

Think about taking out a loan on your FD instead of breaking it. Any bank, whether it’s a commercial or small finance bank, allows you to borrow money against your fixed deposit. This can be a better option than taking an early withdrawal from your FD.

2. Select Flexi FDs

Many banks, such as Unity Small Finance Bank, provide these. With Flexi FDs, you can take out a portion of your money without losing all the interest or incurring significant penalties. Because of its flexibility, this kind of FD allows you to grow the remaining amount while accessing a portion when needed.

3. Prepare in advance by having an emergency fund

Keeping an emergency fund on hand is one of the best defenses against having to take premature withdrawals from your FD. It acts as a safety net for your finances, allowing you to pay unforeseen costs without taking money out of your fixed savings.

When is it ideal to break or withdraw FD?

The ideal situations to break or withdraw your FD early are:

1. If there is an investment opportunity that offers higher returns than the current plan.
2. If you need money for emergencies and don’t want to opt for a high-interest loan.   
3. If the penalty is low and the interest rate has increased, you can break your FD and re-invest in a plan that offers higher returns.  
4. If you have to repay a loan and have limited cash on hand, breaking an FD is suitable.

Endnote

It is important to note that each bank levies distinct charges for breaking FD. So, check the charges and interest rates of the new investment plan. These factors will guide you in making a sound financial decision.

(This article is part of DMCL Consumer Connect Initiative, a paid publication programme. DMCL claims no editorial involvement and assumes no responsibility, liability or claims for any errors or omissions in the content of the article. The DMCL Editorial team is not responsible for this content.)