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Premature Withdrawal of Fixed Deposits

Fixed deposits or FDs have remained a staple savings and investment instrument for the Indian household and the lifeblood of the Indian economy for decades. Fixed deposits by individuals still hold the lion's share of all bank deposits in the country. According to RBI data, 58% of all bank deposits in 2018 were made by individuals. 

The popularity of FDs is due to its inherent benefits of assured returns, reliability, flexibility and liquidity. Unlike other low-risk investment tools, fixed deposits don’t have long lock-in periods and you can make premature withdrawals to meet your financial needs. However, there are some terms and conditions that you should be aware of before opting for premature withdrawal of your FD.

Do you know that fixed deposits available on Finserv MARKETS have one of the best credit ratings in the country? They come with stable ICRA MAAA and CRISIL FAAA ratings and offer high returns up to 8.7%.

What is a Bank Fixed Deposit?

A fixed deposit (FD), also known as a term deposit, offers assured returns on money deposited in a bank or NBFC. Investors agree upon a fixed rate of return and tenure before investing in a fixed deposit. At the end of the term, you can withdraw the money plus interest compounded according to the rate of return.

Unlike ULIPs, mutual funds, equities or NPS, FD returns are not market-linked; therefore investors don’t have to worry about losing their money. You can also enjoy tax savings under Section 80C on FDs if they are invested for a minimum period of 5 years.

Benefits of Fixed Deposits

  • Higher returns

Since the RBI has reduced interest rates for popular saving schemes such as Public Provident Fund (PPF) and National Savings Certificates (NSC) from 8% to 7.9%, fixed deposits are gaining more favour among investors.

In 2018, a 1-year bank FD earned more than 6.5% yearly returns while stocks, real estate, and equity and debt mutual funds could hardly provide more than 7% returns. The RBI has also reduced the interest rates on Senior Citizens Saving Scheme and Sukanya Samridhi Yojana. In comparison, fixed deposits available on Finserv MARKETS assures your return up to 8.7% and senior citizens can get returns as high as 9.05%.

  • Immune from volatile markets

While equity mutual funds and stocks have witnessed extreme volatility in recent times and even seen returns falling down to negative, fixed deposits and gold have outshone and outperformed the market to provide consistent and risk-free returns.

  • Flexibility and liquidity

While other risk-free investment tools with guaranteed returns have long lock-in periods, fixed deposits offer high flexibility and easy liquidity. You can invest in an FD with a tenure ranging from 1 week to 10 years but at the same time, you can liquidate the same in any emergency situation. Alternatively, you can also take loans with the fixed deposit as collateral up to a certain specified amount.

How to break FD before maturity

Financial institutions allow you to withdraw from your FD or take a loan against your deposit to meet your immediate financial needs. However, there are some drawbacks of premature withdrawal of FDs such as lower returns and penalties.

With Finserv MARKETS, withdrawing your FD before maturity is easy. You can follow the online process, check the eligible amount and receive the money into your bank account in a few minutes. There’s no need for physical visits or tedious paperwork.

To break your FD, you can take the following steps:

  • Visit the Finserv MARKETS website

  • Login to the customer portal

  • Enter your mobile phone number and passcode or OTP receive on your mobile phone

  • Go to the customer service request section

  • Enter your details and you are done

Disadvantages of premature FD withdrawal

  • When you break a fixed deposit before withdrawal, you don’t get the original rate of return as specified when you opened the FD account. Some banks and NBFCs even charge a penalty for premature withdrawal ranging from 0.5% to 1%.

  • When you start an FD available on Finserv MARKETS, you don’t have to pay any penalty on breaking your FD. However, there is a minimum lock-in period of 3 months. [1]

  • Once you withdraw the money from your FD and interest rates decline, reinvesting your money in a fixed deposit will fetch comparatively lower returns.

  • Some FDs are not eligible for premature withdrawal of money.

Alternatives to premature withdrawal of FDs

Premature withdrawals of fixed deposits can be detrimental to your savings and wealth generation plan. There are alternative ways that you can utilize to avoid closing your FD account, such as:

  • Laddering: Laddering is an investment methodology in which investments are made on multiple financial products with different maturity dates. Investors can benefit by using the laddering approach to FD investments as well. To use the laddering method on FDs, you can invest in multiple FDs of different tenures such as 1-year, 3 years and 5 years. When the 1-year FD matures, you can renew it for 5 years and follow the same process repeatedly. Such a method allows you to enjoy regular liquidity without losing out on high fixed deposit returns.

  • Sweep-in FD accounts: Sweep-in fixed deposit accounts allow you to enjoy the interest rates of an FD and liquidity of a savings account. With such accounts you don’t have to worry about being penalised on withdrawals. In a sweep-in deposit, a specified sum of money (called a threshold) is automatically converted into a fixed deposit. For example – If you have Rs. 2 lakh in your savings account and the threshold limit is Rs. 40,000, then Rs. 1.6 lakh is automatically converted into an FD. In case your savings account has less than the threshold amount, the deficit is covered by withdrawing the required amount from the FD into the savings account.

  • Loan against FD: To avoid breaking your fixed deposit and losing on the compounded rate of returns, you can instead take a loan on your fixed deposit. This will ensure that you will get the original rate of return on your investments and you don’t have to pay the penalty for premature withdrawal.

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