Why Should You Not Break Your FD Before Maturity

Thinking about prematurely breaking your bank FD? Read this post to know why this is not wise and what you can do instead.

Fixed Deposits (FDs) are one of the most popular investment options in India. You invest a lump sum amount for a fixed tenure to generate fixed returns on the investment.

Bank FDs do provide the option of premature withdrawal. However, this is not a wise financial decision. Let’s find out why and what the alternatives are to breaking the FD before maturity-

Here are the primary reasons why breaking your FD is not a good idea-

1. Lower Interest Rate

FD interest rates abundantly depend on the chosen tenure. Banks generally offer higher interest rates on FDs of longer tenures. So, let’s suppose you’ve opened an FD for 3 years at 7.75% p.a interest. However, if you’d like to prematurely withdraw your FD after 12 months, the interest won’t be calculated at 7.75%.

If the bank offers a 12-month FD at 6.20%, the returns for your FD will be calculated at 6.20% as you're prematurely withdrawing the investment after 12 months. In other words, Fixed Deposit rates are calculated based on the duration for which you stay invested. By breaking your FD, you get a lower rate of interest. 

2. Premature FD Withdrawal Penalty

Apart from the lower interest rate, there'll be an additional penalty for premature FD withdrawal. With most banks, this penalty ranges from 0.50% to 1.50%. So, if we take the same example from about, your returns after premature withdrawal at 12 months will be calculated at 6.2%. Subtract the penalty from this rate of interest, and the revised returns will be around 5.70%-4.70%.

Needless to say, the combination of lower rates and premature withdrawal penalty will significantly reduce the interest income you generate from your FD investment.

In case of a financial emergency, rather than searching for how to break Fixed Deposits, you should look for how to manage this urgent need for funds without premature FD withdrawal. If you're looking for the latter, here are a few tips that can help-

1. Take a Short-Term Loan Against FD

People generally break their FDs when they’re in urgent need of money. But rather than prematurely withdrawing your investment and receiving significantly lower returns, you can consider taking a short-term loan against your FD investment.

This is a secure type of loan where your FD account works as collateral against the loan. Depending on the bank you choose, the loan amount can be up to 90% of the amount invested in the FD. 

2. Open Multiple Smaller FDs

If you’re about to open an FD account and want to avoid the scenario where you might have to break it prematurely before the FD maturity, you can consider dividing the amount into smaller accounts. With this, you can break one of the smaller FDs if at all a financial emergency arrives.

Rather than investing the entire lump sum amount in a single FD and earning drastically lower returns on premature withdrawal, this method of multiple smaller FDs can help you ride through the emergency while reducing the losses. 

Fixed Deposits have continued to retain their popularity over the years. But to ensure that you generate the expected returns, it is vital to thoroughly understand how they work and how you can avoid events like a financial emergency affecting your FD returns. Keep these points in mind if you’re about to invest in FD or planning to break it prematurely.

AU Small Finance Bank offers highly competitive interest rates on its FD Accounts. With maturities ranging from 7 days to 10 years, customers can conveniently choose a tenure that matches their financial objectives.

Read More: How is a Fixed Deposit Better than other Investments?