Premature Withdrawal of FD: What You Need to Know

Premature Withdrawal of FD

In India, many people invest their savings in Fixed Deposits (FDs). FDs provide not only security but also reasonable interest rates. However, a financial emergency might cause premature withdrawal of FD. Premature withdrawal of FD means taking out your capital before the FD matures. This step might be important in times of difficulty. This step comes with certain consequences like penalties and lower interest rates. In this article, we will discuss what is fixed deposit, what is premature withdrawal of FD, the consequences of premature withdrawal, and a lot more. 

What is a Fixed Deposit (FD)?

A fixed deposit is an investment where you deposit a certain amount of your capital with a bank or financial institution for a set period, as agreed upon. FDs offer you a fixed rate of interest. You get the invested amount plus a certain amount of interest on it, compounded periodically according to the terms. At the expiry of the period, you get the principal amount with the interest generated on it.

What is the Premature Withdrawal of FD?

Premature withdrawal of FD refers to the act of withdrawal of the funds before its maturity date. FDs are done for a specific period that can range from a few months to several years. If you withdraw the funds before the maturity date then the bank may impose a penalty or might offer a lower interest rate. The penalty is simply deducted from the final interest payment or redemption/refund amount.

Consequences of Premature Withdrawal of FD

The following are the consequences of premature withdrawal of FD.

  1. Penalty Charges: Banks and financial institutions impose a penalty when you withdraw your FD before maturity. This penalty typically involves a reduction in the interest rate, which can vary with different firms less than the stated rate. This means you will receive lower returns on your investment.
  2. Lower Interest Rates: When you close the FD early, the interest rate is adjusted based on the actual period the FD was held. As a result, the returns you earn may be much lower than if you had kept the deposit for the entire term.
  3. Loss of Potential Returns: Fixed deposits are designed to offer long-term benefits. Withdrawing early, you may miss out on the higher returns you could have earned if you had left the FD intact until its maturity.
  4. Tax Implications: Even with premature withdrawal, banks will deduct Tax Deducted at Source (TDS) on the interest earned if it exceeds the prescribed limit. This means you might not get the full interest income you expect.

Alternatives to Premature Withdrawal of Fixed Deposit

The following are the alternatives to premature withdrawal of fixed deposit: 

1. Using a Credit Card

To manage day-to-day spending many people use credit cards. The benefit of using a credit card is you can borrow funds for emergencies. If you have a good credit score and history, you can easily use your credit card to cover immediate expenses. Just be mindful of the interest rates that may apply.

2. Loan Against Fixed Deposit

Banks offer the option to take a loan against your fixed deposit. This allows you to easily gain access to the funds without breaking the FD. Typically, you can borrow up to 90% of the FD amount. However, it often varies with different banks or other financial institutions. The bank holds the FD as security until the loan is paid back.

3. Using Emergency Funds

Many people set aside emergency funds for unexpected expenses. If you have such a fund, you can use it to cover any urgent financial needs without touching your FD. Having an emergency fund can save you from financial stress in times of need.

4. Liquidating Other Investments

If you have other investments, such as stocks or mutual funds, you might consider selling or redeeming them to raise the required funds. Before doing so, check if you can sell them at a reasonable price that helps you meet your financial needs without incurring major losses.

Conclusion 

In times of financial emergencies, the premature withdrawal of an FD might seem like the only option. However, it comes with penalties and reduced returns, which can significantly impact your savings. It’s important to carefully consider the consequences and explore other alternatives like loans against FD, using credit cards, or using emergency funds. Understanding these options can help you make better financial decisions when facing urgent needs. Additionally, it’s crucial to understand the difference between FD and RD. While FDs involve a lump sum investment for a fixed period, RDs require regular monthly deposits, providing more flexibility in certain situations. It is important to consider your specific financial needs and then select the option to avoid penalties and ensure long-term financial growth.

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