Premature Withdrawal of Fixed Deposit: What Happens When You Break It

When you commit your hard-earned money to a Fixed Deposit (FD), you get the promise of stable returns. Your funds are locked in for a predetermined period, ranging from a few months to several years, and in exchange, you get fixed returns. FDs are valued for offering a safety net against the fluctuations of the stock market and other high-risk ventures.

However, there are times when you may have to withdraw your FD earlier than planned. Premature withdrawal of an FD may seem like an easy solution to your immediate financial needs, but this decision has consequences. Keep reading to know what happens when you decide to break an FD before its maturity date.

1. Reduced interest rates and loss of compounded growth

The most immediate effect of premature FD withdrawal is the reduction in the interest rate. Banks calculate the interest on your deposit based on the actual period it remained with them, which is usually lower than the agreed rate for the full term.

For example, if you had a fixed deposit for five years but decided to withdraw your funds in six months, the interest rate of a six-month FD would be applied, which is usually lower.

2. Penalty charges

Banks levy penalty charges for premature FD withdrawals. This penalty rate is often 0.5% to 1%, which can significantly reduce the interest earnings you had expected. To mitigate some impact of such penalties, it is wise to opt for fixed deposits that offer higher interest rates.

You can use an FD interest rate calculator to compare the maturity amount and interest rates of different fixed deposits offered for varied amounts. Through this comparison, you can identify the FD option that maximises your returns the most.

3. Impact on financial planning

When you lock your funds in an FD, it often aligns with a specific financial goal, such as:

• Funding education
• Purchasing a home
• Saving for a trip
• Planning for home renovations or repairs
• Funding a high-value purchase
• Preparing for retirement

Breaking the deposit early disrupts the growth towards these goals, forcing you to either extend your timeline or find alternative funding sources. Here, IndusInd Bank Fixed Deposit can help you. Simply click on the apply FD online option and enjoy periodic interest payouts on a monthly, quarterly, half-yearly, or yearly basis.

4. Reinvestment risk

Upon premature withdrawal, you are suddenly left with a lump sum that needs reinvestment. The challenge lies in finding an investment avenue that offers similar or better returns without increasing risk. However, market conditions might not always be favourable. If rates have fallen since you initially booked your FD, any new investment you choose may yield a lower interest rate.

5. Tax implications

When you withdraw funds from your fixed deposit account early, the interest accrued up to that point becomes part of your taxable income. Depending on your current income tax slab, this addition could potentially increase your tax burden.

Moreover, the bank deducts TDS on FD interest if it exceeds a certain threshold. So, when you opt for premature withdrawal, the bank recalculates TDS at a new interest rate, based on when you withdraw and the rates effective for that duration. This adjustment can also fluctuate your overall tax liability.

The bottom line

Breaking an FD before its maturity is a decision that comes with certain financial implications. These include reduced earnings, penalties, and long-term impact on your savings and financial security.

Therefore, before withdrawing your FD prematurely, make sure to weigh these consequences against the immediate need for funds. You can also consider alternative options, like taking a loan against your FD account, which can preserve your investment while still offering the liquidity you need.