Premature FD Closure: What You Need to Know Before Breaking Your Fixed Deposits?
Fixed Deposits (FDs) are a popular investment choice for many Indians due to their guaranteed returns and safety. However, there are times when you might need to break your FD before its maturity date. This process, known as premature FD closure, involves several considerations and potential penalties. This article will guide you through everything you need to know before opting for premature FD closure, ensuring you make an informed decision.
Introduction to premature FD closure
Premature FD closure refers to the process of withdrawing funds from a fixed deposit account before the end of its stipulated tenure. While FDs offer financial security and assured returns, life’s uncertainties can sometimes necessitate breaking the deposit earlier than planned. Before proceeding, it is crucial to understand the implications, including the penalties and documentation required, such as the fixed deposit receipt.
Reasons for premature FD closure
Emergency financial needs
Unexpected expenses, such as medical emergencies or urgent home repairs, are common reasons for premature FD closure. In such situations, the liquidity provided by breaking an FD can be invaluable.
Better investment opportunities
If you find a new investment option with higher returns, you might consider premature FD closure. However, it’s essential to weigh the potential benefits against the penalties incurred for early withdrawal.
Interest rate changes
Changes in interest rates can also prompt premature FD closure. For instance, if interest rates increase, you might want to reinvest your funds at a higher rate.
The process of premature FD closure
Step 1: Review the terms and conditions
Before initiating premature FD closure, review the terms and conditions specified by your bank. These details are usually mentioned in the fixed deposit receipt or the bank’s website. It is essential to understand the penalty charges and the interest rate applicable for premature withdrawal.
Step 2: Calculate the penalties and revised interest
Banks typically levy a penalty for premature FD closure, which can range from 0.5% to 1% of the interest rate. Additionally, the interest rate applicable will be the rate corresponding to the period for which the FD was held, minus the penalty. Calculate the net interest you will receive after considering these factors to ensure it is a financially viable decision.
Step 3: Gather the required documents
You will need the original fixed deposit receipt, along with your identification documents, to initiate the premature FD closure. Some banks might also require a written application or an online request form.
Step 4: Submit the request
Submit your premature FD closure request to your bank. This can usually be done through the bank’s branch or via their online banking platform. Ensure that all required documents are submitted to avoid delays.
Step 5: Receive the funds
Once the bank processes your request, the funds will be credited to your linked savings account. Verify the amount to ensure it matches your calculations.
Impact of premature FD closure on your finances
Loss of interest income
One of the primary drawbacks of premature FD closure is the loss of interest income. The interest rate applied will be lower than the original rate, and the penalty will further reduce the earnings. Consider this loss carefully before making your decision.
Impact on financial planning
Premature FD closure can disrupt your financial planning. FDs are typically part of a broader financial strategy aimed at securing your future. Breaking an FD prematurely might necessitate adjustments to your investment portfolio and financial goals.
Tax implications
Interest earned on FDs is taxable. When you opt for premature FD closure, the interest income will be added to your total income for the financial year and taxed accordingly. Ensure that you factor in these tax implications when calculating the net benefit of early withdrawal.
Alternatives to premature FD closure
Partial withdrawal
Some banks offer the option of partial withdrawal from your FD. This allows you to withdraw only a portion of the deposit, thereby retaining the interest-earning capability of the remaining amount. Check if your bank provides this facility as it can be a more prudent option.
Loan against FD
Many banks provide loans against your FD, allowing you to meet immediate financial needs without breaking the deposit. The interest rate on such loans is usually lower than personal loans, making it a cost-effective alternative to premature FD closure.
Liquidating other assets
If you have other liquid assets or investments, consider liquidating them instead of breaking your FD. This can help preserve the benefits of your FD while meeting your immediate financial requirements.
Conclusion
Premature FD closure is a significant financial decision that should not be taken lightly. Understanding the terms, penalties, and potential financial impact is crucial before proceeding. Always review your fixed deposit receipt and consider alternatives such as partial withdrawals or loans against FDs. By making an informed decision, you can effectively manage your financial needs while minimising the impact on your investment returns.
