Fixed deposits come with a ‘lock-in’ period. It means you are not allowed to withdraw the fund before the maturity tenure. Banks do this to induce a sense of discipline and help grow your wealth without interruptions. The timeline is 5-years in a tax savings scheme. But you can consider liquidating the cash beforehand under certain circumstances. It comes as a relief in times of short-term needs like a medical emergency, sudden travel plan or an immediate home repair. But it is not advisable to close your FD before the due date. Here’s why.
Mandatory Penalties
The top Indian banks allow you to break your FD in exchange for a penalty. This is subject to ‘Premature Closure Penalty’ as prescribed on the date of deposit. The amount levied may depend on when you withdraw and the terms and conditions of your bank. But it is usually nominal and affordable without stress. The good news is that there are no charges for senior citizens for early fixed deposit withdrawal.
Interest Loss
A reputed Indian bank helps you earn up to 6.5% FD interest rates. Senior citizens can get 0.5% higher interests if the FD reaches maturity.
- You will lose out on them if you withdraw the money before finishing the tenure.
- It reduces the chances of significant wealth growth and leads to financial loss.
- You are less likely to tick off the goal for which the FD was originally created.
It becomes more problematic if you had initially picked a periodical income system where the interest was offered regularly in the form of an income.
No More Loans
Banks usually allow a loan on FD instead of liquidating it. This is usually 90% of the deposit amount. This way you do not have to touch your investment and face the consequences of breaking it. But you will not be allowed to take a loan during a premature withdrawal. It is because the term deposit is pledged as collateral or security. This is quite a loss since most banks charge less interest on FD loans than the usual ones. Further, you may not have to undergo the verification process once again since you already have an ongoing fixed deposit.
Financial Uncertainty
This is especially true if you had invested in an FD for retirement, health expenses or general lifestyle needs. Encashing it before time can disrupt your financial planning and cause a level of monetary uncertainty. You miss the sweep-in facility as well where excess funds in the bank could be transferred to the FD account for higher gains. You lose out on a source of income and do not have sufficient funds for essentials. This is when investors have to arrange for alternatives like using their credit cards or break their savings.
FD is a risk-free investment. But breaking it is not a wise idea unless an emergency crops up. Talk to experts about how the FD interest rates might be affected or the exact penalty that would be levied in case you wish to withdraw beforehand for a hassle-free experience.
