2 min read
25 May 2021

Keeping your fixed deposit secure until maturity helps you grow your savings and gain from fixed and steady interest rates. However, unforeseen circumstances may push you to break your fixed deposit prematurely. Read along to know how your interest calculation is affected by the premature withdrawal of your FD.

How premature withdrawal of FD affects interest rate

Let’s assume that you’ve invested a sum of Rs. 10 lakhs over a tenor of 48 months, with an interest rate of 8.35%. This interest rate is set for 48 months. Say you want to withdraw the FD after 12 months. The interest will be calculated at the former rate, which was the interest rate on a one-year FD when you first opened the fixed deposit.

As a result, you will lose out on a significant sum of money you would have otherwise earned. So, if you complete the tenor, you will receive Rs.13.6 lakhs. But, if you withdraw in a year, you will only get Rs. 10.7 lakhs.
So, before you choose premature withdrawal, do the calculation and be prepared to receive lower returns. If not, try to fund emergencies using other modes of finance like personal loans, cash reserves, or the sale of an asset. This way, you can keep your FD intact until the lapse of the tenor.

Additional read: 4 ways to make your retirement fund pay you a monthly salary

Penalty for premature withdrawal of fixed deposit

Depending on the lender you have chosen, you may have to pay a significant sum of money as a penalty. This could range from 0.55% to even up to 1% of the FD amount. So, before you prematurely close your FD, ensure that you are prepared to pay this penalty.

Choose a lender that makes premature withdrawal easy and has flexible terms. Consider opening a Fixed Deposit with Bajaj Finance, which charges a low premature withdrawal fee while offering an attractive rate of interest on FD’s.

Additional read: How to get a monthly income with an investment of Rs.50 lakh?

Losing interest if you withdraw and re-invest

In some cases, you may withdraw your FD to invest in another FD offering a higher interest rate. It could be a wise decision if you profit after paying the penalty charges. If not, keeping your FD intact makes more sense.

How you can avoid premature withdrawal while ensuring liquidity

You can look at various methods as below to avoid early liquidation of fixed deposits:

1. Laddering FDs using multi-deposit facility

You can use the multi-deposit facility with Bajaj Finance FD to split your investment amount into multiple FDs, each having a different maturity timeline and interest payout frequency. This will ensure you have a steady stream of FDs maturing in succession. Hence, whenever you need cash, you can utilize this money without going for a premature withdrawal.

2. Non-cumulative FDs

Try to keep some FDs in the non-cumulative mode to earn a fixed payout each month. You can use this surplus money to either pay recurring expenses or to tackle emergencies. Sometimes even a fixed income each month helps tremendously in creating a sum in use.

You can set your interest payout frequency as monthly, quarterly, half-yearly, or annually with the Fixed Deposit interest Rate Calculator.

3. Short-tenor FDs

If you are unsure of the time duration you might need your money, go for short FDs starting 12 months with Bajaj Finance FD. Short tenor FDs will also help you safeguard your investment against inflation.

4. Loan against FD

Instead of breaking your FD, you can consider taking a loan against fixed deposits. This is a wise move that prevents you from depleting your finances while also ensuring enough liquidity to help you meet your emergency needs. In addition, this is a low-cost loan as you only must pay a marginal interest rate, over and above the interest you are earning.

You can use online tools such as Experia, your online fixed deposit account, set interest payment frequency, apply for a loan against FD, and manage multiple FDs online.

As you see, with thoughtful planning of your FD investments, you can avoid liquidating your fixed deposits before the maturity timeline. However, if you have to liquidate your fixed deposits, ensure that you’re aware of the various withdrawal terms set by your lender. These terms may change periodically, so make sure you’re aware of these beforehand.

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