Are there any consequences for breaking an  FD?

Investors should understand that the current interest rates offered on bank savings accounts and Certificates of Deposit (CD) are quite low in the Indian banking system. In such a scenario, Fixed Deposits have emerged as one of the safest investment tools for investors. It offers secure returns in addition to other benefits such as tax deductions under Section 80C and credit guarantee insurance. An FD also enables investors to save for their children’s higher education or marriage. Users can withdraw the interest amount periodically before the maturity period ends, but the principal investment amount can be received only after the tenure ends. However, in some cases, investors break an FD before the maturity period.

FD breakage outcomes:- 

The following are some consequences of breaking an FD before maturity:

  1. Penalty

The penalty charged for breaking an FD prematurely will be mentioned in the terms and conditions of an FD agreement. The penalty and withdrawal procedure varies for every lender. The lenders charge a penalty of 1% on partial or full premature withdrawal of a fixed deposit.

  1. Lower interest rate 

The main motive for creating a fixed deposit is the returns earned. When an investor breaks an FD, the interest rate applicable will be less. The interest rate calculator for fd is computed on a compound interest basis. The interest rate on fixed deposits withdrawn before maturity will be at the rate applicable during the first quarter of investment or at least 6 percent per annum, whichever is higher in the case of senior citizens.

  1. Tedious process 

For investors who withdraw the fixed deposit prematurely, there are various steps involved in applying for FD withdrawal and the bank approving it. An investor should fill out a form to apply for FD withdrawal. A review of multiple documents is made by the bank or financial institutions. This process can vary depending on the bank policy and the agreement signed while opening the fixed deposit.

  1. Prevention of growth

Fixed Deposits provide investors with a decent income. The minimum amount required to open an FD will be mentioned by the bank or financial institution. The interest rate of a fixed deposit is decided by the banks as per their guidelines. Due to the early withdrawal of fixed deposits, investors might not be able to earn as much as they would have gained had they kept it for a few more years.

  1. Financial uncertainty

A fixed deposit is an investment option you can choose to earn passive income. However, since the FD matures at a set time and the investor is required to pay the principal amount along with the interest earned, they may have to withdraw it before maturity to meet emergency requirements. But since an FD has a fixed tenure and bank interest rates are higher than most other investments, breaking it will cut down a major source of income.

  1. Factors to consider before breaking FD 

An investor must calculate the risk factor, interest rate, and other charges prior to breaking fixed deposits. Premature withdrawal will incur a penalty which may be offset by the loss due to lowered interest rate.

  1. Look for alternatives 

There are multiple alternatives provided by lenders to allow investors to meet emergency financial requirements. A loan on a fixed deposit is one of the most popular alternatives. Depending on the amount and tenure of fixed deposits, banks provide loans on FD. Personal loans and instant lines of credit can be opted out instead of breaking an  FD.

  1. Have a financial backup 

Individuals should consider having a financial backup plan in place to ensure that they do not lose money when unexpected events occur. Depending on your situation, your backup plan could be in the form of shares, mutual funds, or by keeping a portion of investments liquid.

  1. Read the terms and conditions

It is very important to read the terms and conditions thoroughly before opening a fixed deposit account. As the policy changes from one lender to another, an investor should calculate FD interest, penalty charged for premature withdrawal, and payout period in detail before opening a fixed deposit (FD) account.

You may also read – Difference between fixed and recurring deposit

Conclusion

An FD before maturity is profitable to investors when they wish to withdraw the investment before maturity. During an uncertainty when there is no other alternative, one can break a fixed deposit. Avoiding additional charges and the cumbersome process of breaking a fixed deposit by selecting the right lender is essential. The steps in this article will help you understand how to save time and increase your chances of earning more interest from the same investment on your fixed deposits.