A fixed deposit account is one of the safest investment options in the country as it is comparatively risk-free and also guarantees returns. It is an investment where a customer deposits a certain sum of money in an account, for a given tenure and earns interest on it.
In an FD account, the amount which is deposited is locked without any scope of withdrawal when needed. So if the investor does need the money on an immediate basis, he or she can opt for premature withdrawal or breaking of the fixed deposit.
Withdrawal of the money in the fixed deposit account before maturity is termed as premature withdrawal. This is done if the investor needs money on an urgent basis. An investor can also withdraw the money in the fixed deposit before its maturity if there is an investment option which is better than the Fixed Deposit.
The fixed deposit can be broken prematurely through net banking if the investor is not able to visit the bank.
If done in the branch, the fixed deposit receipt needs to be submitted to the bank which is signed by all the account holders. In case, the receipt is misplaced, a fixed deposit liquidation form needs to be filled by the account holder. Once filled and submitted, the bank processes the request and the money is transferred to the investor’s personal account.
Most banks charge for premature withdrawal of the fixed deposit. This is usually 0.5% - 1.00% of the interest rate.
However, some banks do not charge any penalty in case of an emergency or if you wish to invest the same amount in another investment option provided by the bank.
Apart from this, when an investor closes an account prematurely, the rate of interest is lowered when compared to the fixed interest initially given. For example, let us say that an investor has deposited a certain amount on an FD which earns an interest of 8% annum for 3 years. For the first year, interest earned was 6% per annum. If withdrawn prematurely after one year, the interest paid to the investor will be 6% per annum and not 8% per annum.
Hence, unless it is absolutely necessary, premature withdrawal of fixed deposit results in a great loss for the investor.
For some banks, deposits cannot be withdrawn before a minimum of 6 months since the day, the account was opened and if done so, no interest is paid.
Know more: How to Choose Best FD Scheme 2021
Banks are allowed to charge their own penalty fee in the case of premature withdrawal of FD, as per the Reserve Bank of India.
However, most banks charge from 0.5% to 1% of the interest rate and this has to be communicated to the investor before the FD account is opened.
Some major banks such as HDFC Bank charge 1% for premature withdrawal. On the other hand, ICICI Bank charges 0.5% to 1% and State Bank of India charges 0% to 0.50% of the interest rate.
One of the reasons why investors break FDs is when there is an urgent need for money due to various reasons. At that time, premature withdrawal can help with their financial urgency.
Another reason why FDs are broken is when the current rate offered on the fixed deposit is more than what they were given. So in that case, they break the FDs and invest the money again in another fixed deposit account and receive higher rates of interest. It is important to seek assistance from the bank and calculate the returns before breaking the FD.
Hence, if the fixed deposit is close to maturity, breaking it to invest the money is not advisable. A lot of money is lost in the pre-withdrawal charges as well as due to lowered interest rates. It is advised to let the FD mature, get the returns without any loss and then invest it in another FD or any other investment option.
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