FD Premature Withdrawal – FD can be broken prematurely. But, on doing so, the interest is less and a penalty has to be paid.
FD Premature Withdrawal: People have trusted Fixed Deposit (FD) for years, because it offers low risk and guaranteed returns. Another big advantage of FD is that if needed, you can break it prematurely through pre-mature withdrawal. However, there are some disadvantages of breaking FD. While on one hand you get less interest, banks also charge a penalty. Penalty rates are different in different banks, which usually range from 0.5% to 1%. This penalty is levied on the interest received, not on the total deposit amount.
On breaking FD prematurely, interest is given at card rate instead of booked rate. If you are breaking FD prematurely, then you will not get the effective interest rate at which the FD account was opened. In banking language, this is called booked rate. On breaking FD, interest is given at card rate instead of booked rate. Card rate means that the interest rate given by the bank on FD for the period after which the FD is broken will be the same.
How much loss will be incurred on breaking a 5-year FD in a year
For example, if you made an FD of Rs 1 lakh for a period of 5 years, the interest rate of which was 7%. The interest rate of a one-year FD of the same bank is 6%. Now if you break a five-year FD in a year, then you will get interest at the card rate (6%) set by the bank for that one year. Along with this, you will also have to pay a penalty of 1%, due to which your effective interest rate will be only 5%. If you had kept the FD for five years, you would have got interest at the rate of 7%, which would have given a profit of Rs 7000. But if you make a pre-mature withdrawal, you will get only Rs 5000, which will cause a loss of Rs 2000.
How to avoid loss
To avoid breaking the FD, you can make several FDs in small amounts instead of one big FD. By doing this, when you need money, you can fulfill your need by breaking only a few FDs, and your interest on the remaining FDs will be safe.
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