Introduction
Fixed deposits (FDs) are one of the safest fixed-term investment options that allow premature withdrawal. The term, premature withdrawal, refers to the closing of the fixed deposit before the stipulated time and subsequent withdrawal of the money.
It is well known that financial institutions like banks generally discourage premature withdrawal. Is breaking a fixed deposit before the due date a wise thing? This question arises quite often. Let us help you find out the pros and cons of breaking a fixed deposit before the completion of tenure.
How is the interest amount affected?
Banks calculate interest on FD depending on the lock-in period and the amount invested.
The discontinuation of a fixed deposit primarily affects the interest accrued on the principal. The interest FD calculator helps to find out the alterations in the interest amount on breaking a fixed deposit.
Please note that any withdrawal done within seven days of starting an FD is not liable to interest calculation.
Penalty Charges
The penalty charges for premature withdrawal differ from bank to bank. The banks enjoy discretion and calculate interest on FD based on parameters such as investment tenure. A few banks offer zero penalty charges, whereas some banks charge a penalty depending on the withdrawal period. To discourage premature withdrawal, banks usually charge between 0.5% and 1% of the interest rate.
When a depositor breaks an FD before maturity, the interest rate offered initially is not the same anymore. The interest reduces comparatively. For example, an investor deposited a certain sum of money at an interest rate of 7% for a maturity period of 4 years. Let us suppose that the interest rate for one year is 6.7%. The penalty charge is 1%. Now, if the investor closes the fixed deposit at the end of 1 year, the interest payable to the customer will be 5.7%. The interest FD calculator provides a quick solution while estimating the interest rates.
How to avoid penalty charges?
To meet an urgent need for money, we often resort to discontinuing a fixed deposit investment. And this attracts penalty charges. We can dodge the penalty by considering the below-mentioned ways.
OD / Credit Card against fixed deposits Instead of breaking an FD before the fixed time, an investor can avail OD (Over Draft) or Credit Card against the deposit amount. Most banks offer loans up to 90% of the principal amount.
- Laddering
Investment in different fixed deposits rather than one provides greater flexibility to the investor. Choosing dissimilar FDs with unlike investment parameters is often called laddering. It helps to build a diversified portfolio. Moreover, withdrawal becomes comparatively easy. The discontinuation of one will not hamper the interest accrued on the other.
For instance, an individual can invest an amount of Rs 5 lakhs in two fixed deposits of Rs. 2.5 lakhs each, rather than one FD of Rs. 5 lakhs.
Consequently, an investor can avoid penalty charges by taking up the appropriate investment strategy.
Conclusion
The breaking of FD before maturity is not always the best choice. The financial growth interrupts due to loss of interest and penalty charges. It is vital to take the right decisions and calculate the interest on FD using an interest FD calculator.
