A Fixed Deposit is a scheme that keeps your money locked, with a particular rate of interest, for a tenure stipulated by you. Upon maturity, the returns from an FD are much higher than a savings account, which is why many consider it a safe and profitable investment.
The best Fixed Deposit scheme is one that not only offers a high rate of interest, but also the option to terminate it before maturity. This, of course, comes at a cost but when you’re in need of money, you can’t help pull out all the stops, even if it means your savings.
Why do Investors Opt for Premature FD Withdrawal?
The premature withdrawal of a Fixed Deposit, generally, happens in two scenarios. First, there can be an emergency that demands funds on short notice. Second, you might want to shift your Fixed Deposit to another financial institution offering a higher rate of interest.
Repercussions of an Early Withdrawal
Premature withdrawal of an FD will result in repercussions. Here are two of them.
Rate of Interest
When you decide to withdraw an FD, the rate of interest levied will depend on the period between the investment and the withdrawal date.
For instance, let’s assume, you’ve deposited Rs.75,000 in a 4-year Fixed Deposit with a 10% rate of interest. You then decide to withdraw the money in exactly a year. Now, you’ll not earn interest at a rate of 10% because that was applicable for a 4-year FD. Instead, if the rate of interest for a one-year FD is 7%, the same will be levied on your FD.
A penalty might be imposed during premature withdrawal. Generally, 0.5-1% is deducted from the applicable rate of interest. Some financial institutions waive off this penalty by scrutinising the emergency causing you to break the deposit. You can also be pardoned if you reinvest the funds with the same bank or NBFC.
When Should you Break your Fixed Deposit?
Terminating your Fixed Deposit early can be beneficial if it has been recently opened. For instance, consider a situation wherein you invest Rs.1 lakh in a 4-year FD offered at a rate of interest of 8%. If you see it out till maturity, the interest will amount to Rs.32,000.
Now, consider another instance where you decide to break the same FD after 6 months to reinvest in another FD offering 9% rate of interest. Now, let’s assume that the rate of interest for a 6-month FD is 6.5% and as a penalty, 1% is deducted from it. This results in a 5.5% rate of interest and you’ll earn Rs.2,750 as interest charges.
If you invest the withdrawn amount in the new scheme, you’ll get Rs.31,500 in interest. Add the old and new interest amounts and you get Rs.34,250 (2,750+31,500), which is Rs.2,250 (34,250-32,000) more than what you would have earned from the initial investment.
The Withdrawal Process
In order to break your Fixed Deposit, the FD receipt or certificate with the signature of all the account holders must be submitted at the financial institution. If you do not have these documents, a Fixed Deposit liquidation form can also be submitted. Alternatively, liquidation can also be done through net banking.
A Fixed Deposit should only be broken if there is a financial crunch. However, you must always consider other financing options, seek help from experts, and use a FD maturity calculator to make an informed decision.