While taking FD, most people focus only on the returns they get, but this alone is not enough. Your hard earned money can be lost if there is a slight disturbance. In such a situation, it is better that you know about all the things.
FD is considered an easy way of safe investment. People who do not want to take risk in investment usually prefer to invest in FD. But sometimes things are not as easy as we think. One should first check the interest rates offered on FDs for different tenures. It would be better if you invest in Fixed Deposit only after knowing all the terms and conditions. If there is any carelessness then your money can be lost.
The good news for retail investors is that fixed deposit (FD) rates are on the rise again. Most of the banks have increased the interest rates on fixed deposits and this is a good time for depositors. But investors need to understand the different categories of FDs and the rules related to breaking FDs prematurely in case of emergency.
Understand the math of FD like this
Broadly speaking, there are two categories of FDs: cumulative and non-cumulative. When you choose to invest in a cumulative FD, banks or non-banking financial companies (NBFCs) do not pay any interest during the deposit period. The interest you get on the money deposited is the interest credited with the principal amount at the time of maturity. With non-cumulative FDs, you can get interest payouts on a monthly, quarterly, half-yearly and yearly basis. The tenure of FD can be from 7 days to 10 years.
Which FD is better
Those looking to avail tax benefits should opt for tax-saving FDs with a mandatory lock-in period of five years. Through these, you can get tax exemption up to 1.5 lakhs. However, you can neither withdraw your money from such FDs ahead of time nor can you pledge them for loans.
Premature Withdrawal Rules
Some banks and financial institutions offer the option of premature withdrawal. Most of these charge interest on pre-mature FDs. This penalty charge usually ranges from 0.5% to 3% of the interest rate. However, some banks do not levy penalty if the amount withdrawn is invested in any other scheme offered by them. You can close your FD online using the mobile app of the bank or NBFC or through net banking or by visiting the nearest branch of the bank.
For your convenience, we are going to explain the rules and penalties regarding premature withdrawal of FDs in public sector banks, private banks and NBFCs.
State Bank of India (SBI)
The bank charges you a penalty of 0.50% on premature withdrawal of FDs up to Rs.5 lakhs. If the investment is more than Rs.5 lakhs, SBI charges you a penalty of 1% on pre-closure. Also, the bank does not pay any interest on deposits held for less than seven days.
Punjab National Bank (PNB)
The bank charges a penalty of 1% at the time of premature cancellation or partial withdrawal of FD for all tenures.
HDFC bank
The interest rate applicable for premature closure of FD will be lower than the interest offered. Also, in case of premature closure of FD account (including sweep-in and partial), banks levy a penalty of 1%.
ICICI Bank
For deposits below 5 crores, the bank charges a penalty of 0.5% if you close the FD in less than a year. For deposits above Rs 5 crore, 1.5% penalty is levied if the account is closed after five years and 1% penalty is levied for premature withdrawal for less than five years.
Bajaj Finance
No interest is earned on FD if the account is closed between 3 to 6 months. After six months, the NBFC will levy an interest penalty of 2-3% on premature withdrawal, subject to terms and conditions.
How to choose the right FD
If you are going to take FD then you should take care of some things. You must first check the interest rates offered on FDs for different tenures. Find out if the rates are quarterly or compound. FDs with monthly compound interest give higher returns. Before opening an FD account, assess the credibility of the bank or financial institution. You can also use a laddering strategy to maximize your FD returns. Avoid choosing an FD solely on the basis of returns.
Sweep-in FD
Sweep-in FDs are also a better option as they offer the same interest rate as FDs and the same liquidity as a bank savings account, in one go. There is no penalty for premature cancellation of sweep-in FD.
