Fixed deposits rank among the most favored investments in India. They are secure, offer good returns, and provide the investor with great benefits. Fixed deposits come with a maturity date, upon which the investor can re-invest the money or withdraw it completely. However, investors can also break the FD prematurely.
In this article, we will explore the consequences of breaking the fixed deposit before its maturity date.
The time frame for FD maturity is from the date of deposit to the maturing date when the investor receives their money back together with any income they have earned. It might range from a few days to several years and is fixed. The maturity date is set when opening the FD.
Upon maturity, FDs are handled in two ways.
The FD is automatically renewed for one year, or the previous tenure, based on the tenure specified by the account holder, or
The FD's principal and interest are automatically liquidated and transferred to the account owner's selected account
The account owner can choose what to do with the maturity amount while opening the FD.
You have the option to take your FD amount before the maturity date or when it matures from your bank. However, tax-saving/non-withdrawable fixed deposits do not permit partial withdrawals before maturity as the tax-saving FDs often have a five-year lock-in term.
Now let us understand what each type of withdrawal means.
Withdrawal Upon Maturity: You can easily liquidate or withdraw an FD at maturity by visiting a branch or using the net banking facility.
Premature Withdrawal: If you require funds immediately, you can withdraw your FD before it matures. Banks typically charge a penalty for prematurely or partially withdrawing an FD.
A premature withdrawal occurs when you remove your FD before its maturity date. Financial institutions typically have temporary policies in place for such situations. There are several disadvantages to breaking an FD before it matures.
One of the primary benefits of an FD is the compound interest it provides. By compounding interest, the interest earnings are reinvested and added to the principal amount, resulting in better returns over time. When you prematurely withdraw from your FD, the interest computation is usually changed accordingly. This implies you could lose some of the interest you would have gained had you waited until the deposit matured.
If an FD is withdrawn prematurely, the investor must pay a penalty before the minimum term has expired. Banks do this to compensate for the loss incurred as a result of the early withdrawal. These penalties can range from 0.50% to 2% or higher, depending on the bank. Penalties vary depending on the bank's policies. To understand the specific penalties and charges that apply, it is critical to read the terms and conditions of your FD agreement.
Another factor to consider when prematurely withdrawing from your FD is the effect on your tax liabilities. The interest earned on these deposits is taxed, and the bank deducts the tax at source (TDS).
When you withdraw your deposit before maturity, however, the TDS is adjusted based on the reduced interest rate that applies to premature withdrawals. This means that the TDS amount may be recalculated, potentially resulting in changes in your tax payments.
Breaking the FD prematurely can be a tiresome process at times. It involves paying the penalty charges and Sometimes, physically going to the bank branch and making the premature withdrawal may be time-consuming and cumbersome.
A premature withdrawal from an FD can have serious consequences. Before making any rash decisions, it is critical to carefully weigh your options.
Maintaining a solid financial track record and holding the deposit until maturity is critical for establishing creditworthiness and maximizing returns. If you require immediate cash, it is better to take a loan against your FD rather than break it!
No. FDs don’t have any impact on your credit score. Fixed deposits are not connected to your credit-related activities, hence breaking the FD doesn’t increase or decrease your credit score.
Yes. FDs are taxable, whether or not they are broken before their maturity date.
No. The penalty charges vary from one bank to another. The penalty rate ranges from 0.5% to 1.0% of the withdrawal amount.
If you find a better investment option offering a higher interest rate, then it is advisable to break your current FD and seek the option that provides higher returns.
Yes. You can have multiple FDs within the same banks or with different banks.
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