What Happens if You Withdraw FD Before Maturity?

Fixed Deposits (FDs) are one of the most popular investment options in India. You also might have invested in an FD to earn fixed and reliable returns. But life is unpredictable and circumstances can change unexpectedly. You might find yourself in a situation where may need to ‘break’ your FD before its maturity date. You might be wondering what a premature withdrawal means for the money you have invested. In this blog post, we will explore the implications of premature closure of a Fixed Deposit.

Understanding Premature Withdrawal

A Fixed Deposit is a financial instrument offered by banks and other financial institutions that lets investors deposit a lump sum amount for a specified period at a fixed interest rate. The returns earned depend on the tenure of the deposit. However, there might come a time when investors need to access the funds before the maturity date.

When you withdraw your FD before its maturity date, it is considered a premature withdrawal. Financial institutions usually have policies in place for such cases as they need to look after the interests of depositors while maintaining their own liquidity. In the next section, we will take a closer look at what happens when you choose to withdraw your FD prematurely.

The Implications of Early Withdrawal

Penalties and Charges

The first thing you need to be aware of is that there are applicable penalties / charges for premature withdrawals of FDs. The exact amount varies from one institution to another. Typically, the penalty involves a reduction in the interest rate. Banks do this to compensate for the loss they incur due to the early withdrawal. The interest rate reduction could range from 0.5% to 1%, though in some cases it might be higher. It is crucial to read the terms and conditions of your FD to understand the specific penalties and charges that apply. However, remember that even though you could lose some interest as a penalty, you will still receive your initial money back.

Effect on Interest Earned

One of the main advantages of a cumulative FD is the compound interest it offers. Compound interest means that your interest earnings are reinvested and added to the principal amount, resulting in higher returns over time. When you withdraw your FD prematurely, the interest calculation is usually adjusted accordingly. This means that you may lose a portion of the interest you would have earned if you had kept the deposit until maturity.

Tax Implications

Another aspect to consider when withdrawing your FD prematurely is the impact on your tax liabilities. The interest earned from Fixed Deposits is subject to tax and the tax is deducted at source (TDS) by the bank. However, when you withdraw your deposit before maturity, the TDS is adjusted based on the reduced interest rate applicable to premature withdrawals. This means that the TDS amount might be recalculated which might lead to changes in your tax payments. It is advisable to consult a tax professional to understand the tax implications of premature FD closure.

Impact on Loan Eligibility

FDs are often considered as collateral for securing loans. When you withdraw your FD prematurely, it might impact your ability to apply for loans. Another point to note is that banks evaluate your creditworthiness based on various factors, including your financial stability. Having a history of frequent premature FD withdrawals could raise concerns about your financial stability or have an impact on the terms and conditions offered by the bank. It is important to remember that while premature FD withdrawals do not directly impact your credit score, maintaining FDs until maturity indicates a healthy financial track record which can influence your bank’s assessment of your financial stability.

Conclusion

Navigating the workings of long-term investments like FDs can be both rewarding and sometimes challenging. As we have explored, premature withdrawal of an FD can have significant consequences. It is crucial to carefully evaluate your options before making any hasty decisions. Check out our lucrative Fixed Deposit interest rates which help you to increase your wealth and achieve your financial goals. Don't miss out on the opportunities that FDs can provide. Visit our website, iMobile app or Branch today!