What Happens If You Break Your FD Before Its Maturity?

In summary

Premature withdrawal allows an FD holder to access the deposit before the agreed maturity date. However, the interest earned may be reduced or forfeited, depending on the issuer's rules and the period for which the deposit has remained invested.

For a Bajaj Finance FD, the applicable conditions include:

• Up to 3 months: Premature withdrawal is generally not permitted, except under specified circumstances.
• After 3 months but before 6 months: Withdrawal is permitted, but no interest is payable.
• After 6 months: Withdrawal is permitted, with interest calculated at a reduced rate.
• Tax: Any applicable TDS already deducted and deposited is not refunded by Bajaj Finance upon premature withdrawal.

Before closing an FD, compare the reduced interest with alternatives such as a loan against the deposit, where eligible.

Premature withdrawal refers to closing a fixed deposit before its scheduled maturity date and receiving the eligible proceeds.

When an individual opens an FD, they select a deposit amount, tenure and interest payout option. The financial institution calculates the applicable interest based on these details.

If the depositor closes the FD before the agreed tenure ends, the institution may recalculate the interest based on the actual period for which the deposit remained invested. A premature withdrawal penalty may also apply.

For example, if an individual opens a three-year FD but closes it after 18 months, the interest may be recalculated using the rate applicable to an 18-month deposit, rather than the original three-year rate. The final payout depends on the institution's terms and conditions.

Breaking an FD early can affect the returns and the amount received. The consequences depend on the financial institution, the deposit scheme and the time elapsed since the FD was opened.

The main consequences include:

1. Interest may be reduced

Financial institutions may recalculate the interest based on the actual deposit period instead of the original tenure.

For example, if an FD was opened for 36 months but withdrawn after 12 months, the institution may apply the interest rate applicable to a 12-month deposit, subject to its premature withdrawal policy.

This means the depositor may receive less interest than originally expected.

2. A premature withdrawal penalty may apply

Some banks and NBFCs reduce the applicable interest rate when an FD is closed before maturity.

The penalty varies by institution. It may be expressed as a reduction in the interest rate rather than a separate charge deducted from the principal.

For instance, if the applicable interest rate for the actual deposit period is 7% per annum and the institution applies a penalty of 2 percentage points, the revised rate would be 5% per annum.

The actual rate and penalty must be checked against the FD's terms and the rate applicable to the period for which it remained invested.

3. You may lose the benefit of the original FD tenure

An FD opened for a longer period may carry a different interest rate from a shorter-tenure deposit.

If the deposit is closed early, the depositor may no longer receive the interest originally associated with the longer tenure. The revised interest calculation can reduce the overall earnings.

4. Reinvesting the money may not provide the same returns

Interest rates offered by financial institutions can change over time. If an FD is closed early, the depositor may have to reinvest the proceeds at a rate that is lower than the original rate.

Therefore, it is useful to compare the revised payout from the existing FD with the potential returns from a new deposit before making a decision.

5. Tax deducted at source may affect the payout

Interest earned on an FD is taxable according to the applicable income-tax provisions.

If tax has already been deducted at source (TDS) and deposited with the tax authorities, the financial institution may not reverse that deduction when the FD is closed prematurely.

The depositor should check the TDS details and reconcile the tax credit while filing the applicable income-tax return. The final tax liability depends on the individual's total taxable income and applicable tax provisions.

The reduction in interest depends on the original deposit tenure, the actual period invested and the applicable premature withdrawal penalty.

Consider an illustrative example:

An individual opens an FD of Rs.1,00,000 for 36 months. The original interest rate is 7.5% per annum. However, the individual decides to close the deposit after 12 months.

Assume that the rate applicable to a 12-month deposit on the original booking date was 7% per annum.

If the institution applies a penalty of 2 percentage points, the revised interest rate would be:

Revised interest rate = 7% − 2% = 5% per annum

The example illustrates how the interest rate may change. The actual payout will depend on the financial institution's calculation method, deposit scheme, applicable rate card, interest payout frequency and any TDS already deducted.

For an accurate estimate, the depositor should check the premature withdrawal calculation provided by the institution before confirming the request.

Bajaj Finance FD holders can raise a premature withdrawal request through the service portal.

The broad process is as follows:

1. Visit the Bajaj Finance website: Open the official website and select the sign-in option.
2. Log in to your account: Enter your registered mobile number and verify it using the OTP.
3. Open the service request section: Navigate to the relevant service or relationship-related options.
4. Select your FD: Choose the fixed deposit for which you want to raise a premature withdrawal request.
5. Choose premature withdrawal: Select the relevant service request option.
6. Review the payout details: Check the premature withdrawal calculation and the amount payable.
7. Submit the request: Complete the required OTP verification and submit the request.

After submission, a representative may contact the depositor to guide them through the next steps. The current service portal instructions and any additional documentation requirements should be followed.

If funds are required before an FD matures, closing the deposit is not the only option. Depending on the financial institution and the depositor's eligibility, other approaches may help meet the immediate requirement.

1. Consider a loan against FD

A loan against FD allows an eligible depositor to borrow money by using the fixed deposit as security. The FD remains invested and continues to earn interest, subject to its terms.

Under Bajaj Finance's, a loan against fixed deposit may be available after three months from the deposit date, subject to eligibility and other conditions.

The key terms include:

• Loan amount of up to 75% of the deposit amount.
• Interest rate 2 percentage points above the interest rate payable on the deposit.
• Loan availability subject to the institution's eligibility requirements.

For example, if an eligible FD has a principal amount of Rs.2 lakh, the maximum loan amount under a 75% limit would be Rs.1.5 lakh.

This option may help meet a short-term funding requirement without closing the deposit. However, the borrowing cost and repayment obligations should be considered before applying.

2. Use an emergency fund

An emergency fund is money kept separately to meet unexpected expenses, such as medical bills, urgent repairs or temporary income disruption.

Maintaining readily accessible savings can reduce the need to close long-term deposits before maturity.

The appropriate emergency fund amount depends on factors such as monthly expenses, income stability and financial responsibilities.

3. Consider FD laddering

FD laddering involves dividing savings into multiple fixed deposits with different maturity dates rather than investing the entire amount in a single long-tenure deposit.

For example, an individual with Rs.3 lakh may divide the amount into three deposits of Rs.1 lakh each, with different tenures.

This approach can provide access to some funds as individual deposits mature, while the remaining deposits continue according to their original schedules.

The choice of deposit amounts and tenures should reflect the depositor's expected cash-flow needs.

A few practical measures can help reduce the likelihood of closing an FD before maturity:

• Choose a suitable tenure: Select a deposit period that matches when the money may be required.
• Maintain liquid savings: Keep a separate emergency reserve for unexpected expenses.
• Avoid investing all available savings in one FD: Distribute deposits across different maturity dates where appropriate.
• Review the payout option: Choose a cumulative or non-cumulative deposit based on whether interest is required periodically or at maturity.
• Understand the withdrawal terms: Check the lock-in period, interest recalculation and other conditions before booking an FD.

Planning the deposit around expected financial requirements can help reduce the need for premature withdrawal.

Breaking an FD before maturity can reduce the interest earned and may result in a lower payout than originally expected. The impact depends on the financial institution's premature withdrawal policy, the actual deposit period and the applicable penalty.

For a Bajaj Finance FD, withdrawal is generally not permitted during the first three months, subject to specified exceptions. Withdrawals after three months but before six months do not earn interest, while withdrawals after six months are subject to a reduced interest rate.

Before closing a deposit, compare the premature withdrawal payout with alternatives such as a loan against FD or using separate emergency savings. Reviewing the applicable terms can help make the decision more informed.