What Happens if You Break a Fixed Deposit Before Maturity?

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Fixed Deposits are one of the most celebrated ways of investing for guaranteed returns at a low risk. In a Fixed Deposit, you are required to invest a certain sum of money once for a fixed tenure stretching from a couple of months to 5 years and above. Crediting the money out before the expiry of your tenure can result in multiple complications.

In this blog, we will explore the consequences of withdrawing your FD before the maturity date.

What is a premature withdrawal of FD?

Fixed Deposit(FDs) are fixed for an agreed amount of time over a pre-defined interest rate. Investors have to lock in their funds for the entirety of the decided tenure to receive the complete interest amount. However, life is unpredictable, and you might suffer from a severe financial crunch, which could cause you to withdraw your FD.

Banks understand this need, and hence, they have provisions that allow you to withdraw your FDs prematurely, but it comes with penalties and consequences. These penalties and consequences vary from institution to institution and are applicable only after issuing a premature withdrawal request.

The consequences of early withdrawal of FD

1. Penalty charges: Withdrawing your FD early to its maturity date has a major downside: the penalty. The penalty percentage is implied in the interest earned, and banks generally charge 0.5% to 1% of the interest amount.

2. Reduced FD interest rate: When you withdraw your FD prematurely, you get a return based on the tenure for which you have maintained the FD.

For example, if you have an FD for 5 years at a 5% interest rate and you withdraw it after 4 years, the interest rate will be calculated based on the 4 years tenure, and you will receive the interest amount as per that.

3. Loss of compounding benefits: FDs calculate their interest value using both simple interest and compound interest. Simple interest is generally considered for short-term FDs, while compound interest is for long-term tenures and fetches the most returns. Liquidating your FDs before time can result in lower returns.

4. No tax benefits: If you have invested in a Tax-Saving FD, prematurely crediting it will nullify the tax benefits you were supposed to receive under Section 80C of the Income Tax Act of India. This, along with the income amount already being taxable, makes it a very underwhelming affair.

How to avoid premature withdrawal of FD?

1. Create an emergency fund: Create an emergency along with setting up an FD. This allows you to take out money from your Emergency Fund instead of opting for the liquid withdrawal of your FDs.

2. Choose flexible FDs: Opt for FDs with flexible tenure or those that allow partial withdrawals. This will enhance your financial security in times of crisis.

3. Use FD laddering: Split your deposit amounts into FDs with different tenures. This allows you to generate wealth while having money available. It also protects you from market or economic fluctuations, making sure you get the most out of your investment.

4. Understand FD terms: Before starting an FD, read the documents carefully and understand the terms related to premature withdrawals and penalties.

Conclusion

FDs are generally made with a significant amount of money. So, it is understandable to reach out to them during an emergency. However, it is important to weigh the consequences of premature withdrawal and explore other alternatives before resorting to it.