They are fixed deposits (FDs) found as one of the many investments individuals use to secure themselves financially. The mandate is that securing FDs means safe, reliable growth of savings with minimal risk. But as in life, it can be unpredictable, and withdrawal from FDs can sometimes be necessary even when they are not maturing.
Breaking an FD before its maturity usually has financial losses, and one should have an idea about the rules and penalties that apply. Let us dive into all this so that you can make informed decisions and minimize losses.
Why Do People Invest in Fixed Deposits?
Fixed deposits are one of the handy options for those who live with the desire for returns and do not want very low risks attached. Also good to save from market volatility and slowly but steadily grow savings over time. Whether for a future goal or an emergency fund, FDs add up to a secure feeling. However, withdrawing the same would affect his financial plans and may introduce unintended losses.
What Happens When You Break an FD Before Maturity?
Most of the penalties and disadvantages of breaking an FD early are as follows:
- Loss of Interest Benefits:The FD gets prematurely withdrawn, and, in this scenario, it comes to the loss of full interest benefits that would have been earned if the FD matured. By lesser rates, most banks pay for premature withdrawals and hence have much reduced returns.
- Penalty Charges: The penalties imposed, according to banks, for such early withdrawals are:
For FD amount up to ₹5 lakhs, penalty could be around 0.50 %.
Between the amounts exceeding ₹5 lakhs to ₹1 crore, the penalty would go high to 1%.
Such charges eat away the principal amounts and further reduce the returns. - Reduced Profits: In addition to the penalty charge, the bank could also collect the under-interest value of interest received from your FD, which means they will scale down profits. Thus, it can happen that even compared to long-time FDs, the amount you get in the end will not be as high as expected.
How to Ensure That You Lose Little or Nothing When You Close an FD
Closing an FD before maturity is, in many cases, unavoidable. However, certain strategies can help lessen the financial repercussions:
- Choose Shorter Tenures: If you think you may require funds quite soon, invest in FDs with shorter tenures. This allows you to access your funds earlier and with lesser penalties.
- Split the Investment: Instead of just one huge deposit, split the amount into smaller portions or different FDs. For instance, with ₹5 lakhs, set up five FDs of ₹1 lakh each. This way, if an emergency arises, you can encash only what you need while leaving the remainder to mature with interest.
- Consider a Loan: If financial exigencies are prompting you to break the FD, think about a loan against it. Banks typically give loans against FDs at competitive interest rates of up to 90% of the FD value. This way, you can settle the current financial problem without having to forgo the FD.
Smart Moves for FD Investments
Keeping the following tips in your mind would ensure that you reap the maximum benefits from your fixed deposits.
- Select the Right Tenure: Select an FD tenure that will help you reach your goals. Wherever between 1 to 5, or even 10 years, time must serve its purpose.
- Compare Interest Rates: Interest rates offered by different banks differ. Research to compare the rates so that you are maximizing your returns.
- Plan for Emergency: Always have a ‘what if’ on your agenda. Consider setting aside liquid funds or an emergency account to avoid breaking an FD in the case of unforeseen emergencies.
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