Why is Breaking Fixed Deposit Not a Wise Decision

Why Is Breaking Fixed Deposit Not A Wise Decision?

Are you looking for ways to invest your money in India? If yes, Fixed Deposits (FDs) are one of the best options to choose! They offer financial security and consistent returns. But, owing to financial emergencies, individuals tend to break their FD before maturity and the question arises, "Is it the right thing to do?

People often withdraw their FDs before maturity. Yet, this decision might not be a bad one in certain situations.

If you are still confused about your decision of breaking an FD before maturity, don't worry. We are here to help you out with such issues. This article will help explore what a Fixed Deposit account is, how to open a Fixed Deposit account online, and if breaking an FD before maturity is the right option.

What is a fixed deposit account?

Banks offer FDs, allowing individuals to invest their money for a set duration and receive a predetermined interest rate.

It is among the most secure investment choices available. All Indian residents, including senior citizens and Non-Resident Indians (NRIs), can open an FD account. Those who invest in them receive guaranteed returns at the time of maturity of the deposit. This timeframe is called the lock-in period. The interest can be earned periodically or after maturity.

Features of fixed deposit accounts

  1. Fixed Deposits offer different investment tenures. The tenure ranges from one month to a decade, with variations depending on the financial institution.
  2. The earnings on the invested sum are compounded at regular intervals. The interval may be monthly, quarterly, or yearly.
  3. Senior citizens can avail Overdraft facility against FDs.

Benefits and drawbacks of fixed deposit accounts

i) Benefits Of Fixed Deposit Accounts

  • Guaranteed profit with maximum security.
  • Tax Advantages of Fixed Deposits.
  • Perks for senior citizens.
  • Financing options using FD.
  • Easy investment method.
  • Adaptable duration.

ii) Drawbacks

  • Interest earned on FD is subject to taxation.
  • Tax Deducted at Source (TDS) implications.
  • Interest rates can fall below inflation levels.
  • No growth in interest returns.

Why should you not break a fixed deposit?

Many people wonder if breaking an FD before its maturity date is correct. Due to this, they often search online for queries like “Can I break FD before maturity?”

It's common for depositors to break a Fixed Deposit before maturity for fulfilling their cash needs or to reallocate the funds with the expectation of higher returns. However, breaking an FD before its term results in a financial loss due to the penalties imposed by banks. This penalty is typically 0.5%-1% of the deposited sum.

You should know the reasons for breaking fixed deposits

There are many reasons for breaking a Fixed Deposit before maturity. Let's look at some of the common reasons and scenarios when breaking it can be a good idea:

Common reasons why people may consider breaking their fixed deposits

  1. Need to acquire funds due to an urgent situation.
  2. Relocation to another country.
  3. Need to pursue higher studies.
  4. Allocate funds to a better investment.

Other probable reasons to break an FD

  • In case of urgent financial requirements: The most common reason for breaking an FD before maturity can be encountering unforeseen costs. For example, a medical crisis that requires immediate funds. Withdrawing from your Fixed Deposit could be a good choice.
  • Considering a more favourable interest rate with another investment: If you discover a more advantageous interest rate through a different investment opportunity, it might be a good idea to withdraw your FD and allocate the funds to an alternative option.

How breaking fixed deposit affects interest rates

There can be many reasons for breaking a Fixed Deposit before maturity. However, before breaking one, you should also know how it affects interest rates for you in the long run. Let's have a look:

Penalty charges for breaking fixed deposits

Fixed Deposits are useful if you need to make early withdrawal of funds. However, banks impose a penalty fee for premature withdrawals. This fee usually ranges from 0.5% to 1% of the interest rate provided.

  • Impact on interest rates and returns: An early withdrawal reduces the returns on the FD. The reason behind this is that the banks impose a fine which is directly cut from your interest rate.
  • Tax implications of breaking a Fixed Deposit: Paying taxes on the interest earned until the deposit is terminated is essential. No additional taxes need to be paid.

Can i break FD before maturity?

Though you are always free to break an FD before maturity, you should know everything about the penalties and the alternatives to breaking one.

Premature/ partial withdrawal

A penalty will be imposed in case of early withdrawal from your FD. The bank's regulations determine the specific penalty amount.

Alternatives to partial/premature withdrawal

  • There are several options available to help you avoid premature withdrawal of an FD while addressing your immediate financial needs.
  • One possibility is to obtain short-term liquidity by choosing a loan against your Fixed Deposit account. You might wonder, "How much loan can I get against my FD?" It is usually 90%-95% of your deposit amount.
  • Another method is to divide a large sum into smaller portions and create multiple Fixed Deposits instead of a single account. Doing so means you do not have to depend only on one deposit.

Plan your finances to avoid breaking a fixed deposit

Always look out to plan your finances so that you don't have to break your FD. Some things to consider:

Generate interest at a fixed rate for a set period

It is always useful to generate fixed interest with an FD to utilise its maximum benefits for as long as possible. It helps you in the long run.

Recalculate the interest rate based on the effective FD

If you still want to withdraw an FD early, you should know that the bank will calculate the revised interest rate with a penalty.

Conclusion

There are many reasons that can compel a person to consider breaking a Fixed Deposit. But, it is not a wise decision in all cases. If you want to withdraw an FD, remember that you will be charged a penalty, and your interest will be diminished with tax implications.

Instead of withdrawing the FD, you can choose from numerous other options available to meet short-term liquidity needs. These options include taking a loan against an FD or applying for a FD-Backed credit card. Try to take advantage of these options to avoid premature withdrawals.

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