Why Should You Not Break Your Fixed Deposit?

Fixed deposits are the safest option to save money. The premature withdrawal of a fixed deposit means an early debit of your investment or savings before the maturity period. There are certain reasons why to not break FD before maturity as they lead to calamities like penalties, taxes, and lower rates of interest depending upon the conditions laid by the bank. 

It is necessary to go through the terms and conditions laid down by the bank before the premature withdrawal of the fixed deposit to overcome financial losses. Before breaking an FD ensure that the cost, benefits, and alternatives of the amount invested meet your financial goals and circumstances.

What is a Fixed Deposit Account?

A fixed deposit is a deposit type in a bank account where the principal amount is deposited for a certain period. The tenure of a fixed deposit is decided by the person who invests the money. This tenure can vary from several days to years. At the end of the maturity period, the principal amount is returned along with compound interest. 

FDs are considered stable as return rates are fixed with a better interest rate than the savings account. The rate of interest depends on the amount and duration set by the depositor. FD accounts can be opened by all citizens of India as well as NRIs.

Why Avoid Breaking FD Before Maturity?

Breaking FD before maturity is not beneficial. However, during an emergency withdrawal of FD can make sense. The process of breaking a fixed deposit is a time-consuming and complicated method. It involves meeting up with many bank representatives and filling up various forms with different conditions being laid down. 

If you want to break an FD, then you should withdraw it when the investment is relatively newer. This results in less loss of money. 

Here are a few reasons why should you not break an FD before maturity:

• The penalty imposed on premature withdrawal of fixed deposits is a major reason why should you not break your FD. This reduces the interest rate or you can even lose your principal amount. The amount received from premature withdrawal is much less than the interest earned if invested elsewhere. 

According to the Reserve Bank of India, banks are allowed to charge penalties in case of premature withdrawal of FD. Therefore most bank charges a penalty from 0.50% to 1.00% of the interest causing a great loss. This can also harm the financial goals of the investor. 

• Withdrawing an FD before the maturity period lowers the rate of interest that would have been earned if the FD had been matured. Long tenures of FDs result in higher rates of interest than short tenure of FDs. The interest rate is lowered for a premature withdrawal of FD that too with a penalty. 

Therefore the combination of penalty and low rate of interest together generates a minimal income on the investment. In some cases, additional tax liabilities are applicable on premature withdrawal of FD

What Can You Do Instead?

To avoid losing money by early withdrawal of FD there are certain alternatives available. These alternatives provide a reason why to not break FD before maturity. Some of these alternatives are:

• Loan against a Fixed Deposit: Instead of withdrawing a FD, a loan can be availed against the fixed deposit. The interest rate is 1% to 2% above the interest paid on the deposited amount in the account. However, this rate of interest differs from bank to bank. Most of the banks allow depositor to avail 90% of the money as a loan from their fixed deposit account. 

• Fixed Deposit Laddering Technique: The best strategy for the alternative to fixed deposit is the laddering process. This process involves distributing the investment of FD across multiple fixed deposit schemes with different maturity periods and interest rates. 

The objective of this approach is to ensure regular returns on the investment and access funds at regular intervals of time. This investment technique provides financial discipline and builds wealth. The investor can re-invest the money received after the maturity period. 

• Sweep-in FD: The sweep-in FD is provided by the bank to the investor, which allows the investor to transfer excess funds from the savings account to the fixed deposit account. The auto sweep feature offers a high-interest rate on the access money in the savings account. For this facility, the fixed deposit and the savings account should be linked. This provides increased liquidity and is flexible according to the customer's needs.

When is it Profitable to Break or Withdraw a Fixed Deposit?

Although breaking an FD is not beneficial in most cases, it is essential to know the costs and benefits of fixed deposit withdrawal priorly so that you can evaluate why should you not break your FD before maturity. However, FD withdrawal can turn out beneficial in certain cases like

• If you get a higher investment opportunity that can overcome the penalty loss and low rate of interest. Breaking an FD can be profitable in this condition.

• In case of emergencies breaking an FD is still a better option available than taking high interest in debts.

• If the penalty is low and the rate of interest has risen then breaking an FD and re-investing the amount is a better option available.

• If you are unable to pay back a loan then breaking an FD and paying money is a better option available rather than bearing up with additional taxes and affecting the credit score.

Conclusion

Fixed deposits are more secure and reliable to safeguard and earn more money on one’s savings. This makes it an attractive investment option. FDs are also known as term deposits. There are certain reasons why should you not break your FD which include the decline of the investment towards loss and a high rate of interest by premature withdrawal or change of the FDs.