Fixed deposits are an attractive investment option for anyone looking for a low-risk, high-return investment. However, there may come a time when you need to break your fixed deposit in order to access your funds. But when is the right time to cash your FD? In this guide, we will explore the factors that determine when it's appropriate to break your fixed deposit, including interest rates, penalties, and the reason for needing the funds. By following these guidelines, you can make informed decisions about your investment and maximize your returns.
In this article, we will explore the consequences of breaking a fixed deposit before the maturity date and consider some alternatives to breaking your FD in case you need quick access to finances.
What is Premature Withdrawal of a Fixed Deposit?
Premature withdrawal refers to the act of withdrawing money from a fixed deposit investment before the maturity date. Most banks and financial institutions allow fixed deposit holders to make premature withdrawals, but they may charge a penalty fee for doing so. The penalty fee is usually a percentage of the interest that would have been earned on the fixed deposit if it had been allowed to mature.
Improved Financial Planning - Flexibility of Fixed Deposits in Long-Term Planning
There are many reasons that investors would need to prematurely withdraw their invested FD amount, including:
- Financial Emergencies: If you face a financial emergency and need to access your money urgently, you may have to break your fixed deposit investment. This could include personal, medical or business-related reasons.
- More Favourable Interest Rates: If you find better interest rates in another bank or financial institution, you may consider breaking your current fixed deposit and reinvesting the money in a new fixed deposit with a better interest rate.
It is important to carefully consider the consequences of breaking a fixed deposit investment. Before making a decision, it is advisable to weigh the potential benefits and drawbacks of breaking an FD early.
Pro tip: It is always a smart move to calculate your interest rates before making an investment decision. Make use of the Shriram Fixed Deposit Interest Calculator for quick and accurate results.
How Premature FD Withdrawals Impact Interest Calculations?
Fixed deposits are a safe and secure investment option that serves as an additional source of income for many investors. When you withdraw a fixed deposit before the maturity date, you will not receive the same rate of interest that was originally agreed upon at the time the FD was opened. The rate of interest earned on the fixed deposit may be recalculated at the revised interest rate, which may be lower than the original interest rate. Here are some examples to help you understand:
Case 1
- An individual invests ₹50,000 for 2 years at an interest rate of 8%.
- The interest rate for 1 year is 7%.
- After 1 year of the fixed deposit, the investor needs to break the fixed deposit prematurely. So, the bank or financial institution will recalculate the interest at the revised fixed deposit rates.
- The penalty for premature withdrawal is 1% of the effective interest rate.
- The final fixed deposit rate would be 7% - 1% = 6%.
- The premature withdrawal amount will be calculated at the revised interest rate of 6% instead of the original rate of 8%.
Case 2
- An individual invests ₹1,00,000 in a fixed deposit for a tenure of 3 years at an interest rate of 7%.
- The interest rate for 1 year is 6% at the time of opening the FD.
- The penalty applied in the case of premature withdrawal is 0.5% of the effective interest rate.
- The interest rate earned for 1 year is 6%.
- If the individual withdraws the fixed deposit after the completion of 1 year, the bank or financial institution will calculate the interest at the effective rate of 6% - 0.5% = 5.5% as the revised interest rate.
- The premature withdrawal amount will be calculated at the revised interest rate of 5.5%, instead of the original rate of 7%.
Premature Withdrawal Charges
The charges for prematurely withdrawing a fixed deposit may vary depending on the bank or financial institution in which the fixed deposit is held. For Shriram Fixed Deposits, the charges are different for different lock-in periods:
Withdrawal Within 3 months
There is a minimum lock-in period of 3 months during which the investor is committed to their fixed deposit investment. The fixed deposit cannot be broken before 3 months, except in the unfortunate case of the demise of the investor.
Withdrawal Between 3 and 6 Months
The investor will only get the principal amount if the fixed deposit is foreclosed between 3 and 6 months. It should be noted that no interest will be earned.
Withdrawal After 6 Months
In case the investor chooses to prematurely close their FD after 6 months, it will be possible but the interest payable will be 2% to 3% lower than the interest rate applicable to fixed deposits.
Alternatives to Breaking Your Fixed Deposit
A fixed deposit is a popular and zero-to-low-risk investment that benefits investors across India. So, before breaking a fixed deposit investment, it is important to consider the potential costs and benefits, as well as any other options that may be available:
- Loan Against the Fixed Deposit: Up to 75% of the fixed deposit amount will be given to the investor if they take a loan against a Shriram Fixed Deposit.
- Emergency Fund: One of the preventive measures you can take includes having an emergency fund set aside for urgent expenses.
- Smaller FD amounts: Before investing in a fixed deposit, you can organise your funds and invest in multiple FDs of smaller amounts rather than one FD of a larger sum. This will allow you to invest some of your money while having a significant amount that is accessible to you.
Conclusion
Premature withdrawal of a fixed deposit is not generally recommended due to the potential loss of interest and the penalty fees that may be charged by banks or financial institutions. Instead, it may be advisable to consider other options, such as taking out a loan to access funds while avoiding the negative consequences of breaking a fixed deposit. Shriram Fixed Deposits offer flexible tenures and interest rates as high as 9.40%* p.a., inclusive of 0.50%* p.a. for investors who are senior citizens and 0.10%* p.a. for women depositors. Furthermore, there is an extra 0.25%* p.a. interest benefit on renewal of matured fixed deposit.
By planning your financial goals carefully and enjoying the attractive features of Shriram Fixed Deposits, you can continue your financial journey without the need to prematurely withdraw your fixed deposits. Invest now and benefit from investing your money in a safe investment option with guaranteed returns.
FAQs
- What is a fixed deposit "break" or "premature withdrawal"?
A fixed deposit break or premature withdrawal refers to the process of withdrawing your invested funds before the maturity date of the fixed deposit.
- Why would I want to break my fixed deposit investment?
There may be various reasons why you might want to break your fixed deposit investment, such as an unexpected financial emergency, medical expenses, a better investment opportunity elsewhere or a change in your financial goals.
- Are there any charges or penalties for breaking a fixed deposit investment?
Most financial institutions charge a penalty for breaking a fixed deposit before the maturity date. The penalty may be a percentage of the invested amount and may vary depending on the tenure of the fixed deposit and the time remaining until maturity.
- Is it a good idea to break a fixed deposit investment?
Breaking a fixed deposit investment may not always be the best decision, as it may result in the loss of potential interest earnings. Furthermore, it may incur penalty charges that you may have to pay. It is important to carefully consider the pros and cons before deciding to break a fixed deposit.
- How can I break my fixed deposit investment?
To request the premature withdrawal of a fixed deposit, the following documents need to be submitted: a letter of request, the original receipt of the deposit on ₹1/- revenue stamp paper and a cancelled cheque leaf. The process might differ from one financial institution to other. It is advisable to contact your financial institution for more information.
Key Takeaways
- Premature withdrawal refers to the act of withdrawing money from a fixed deposit account before the maturity date.
- Most banks and financial institutions allow fixed deposit investors to make premature withdrawals, but they may charge a nominal penalty for doing so.
- There are many circumstances in which it may be acceptable to break a fixed deposit investment, such as unexpected emergencies, medical expenses, diversifying investment portfolios and more.
- It is generally a good idea to have an emergency fund set aside for unexpected expenses, rather than relying on breaking a fixed deposit investment.
- There may be other options available to you at the bank or financial institution to help you get access to funds, such as a loan against your FD.
