How to break an FD without penalty: Rules and exceptions you should know
Fixed Deposits are a popular savings option due to their guaranteed returns and safety. However, there may be times when you need access to your funds before the FD term ends. Breaking an FD early is usually subject to penalties, but there are specific circumstances under which it can be done without incurring any charges.
Understanding FD penalties
When you break an FD before its maturity, banks typically charge a penalty that reduces the interest earned. Depending on the bank's policy, this penalty can range between 0.5% to 1% of the applicable FD interest rate. The penalty means you receive lower returns than initially promised, which is a significant loss if the FD interest rates are high.
Circumstances where FDs can be broken without penalty
- Financial emergencies or medical needs
In a financial emergency, such as unexpected medical expenses, some banks may allow early withdrawal of FD amounts without imposing a penalty. Banks typically consider these situations unavoidable and may waive the penalty in such cases.
- FDs with flexible terms
Some banks offer 'flexi' FDs, where the funds are linked to a Savings or Current Account. These FDs allow for partial withdrawals or premature closures without penalties if the amount withdrawn does not exceed a set limit. If you have a flexible FD, it is worth checking with your bank about the conditions for early withdrawal.
- Tax-Saving FDs
For Tax-Saving FDs, there is a lock-in period of five years. Although breaking these FDs before maturity typically attracts a penalty, the interest earned might still be accessible without charges if you need it for a specific tax-related reason, like educational expenses.
When breaking an FD is a smart choice
While breaking an FD early generally leads to a loss of interest, there are occasions when it could be a wise decision. Consider the following situations:
- High-interest debt
If you have high-interest debt, such as Credit Card balances or Personal Loans, it may make more financial sense to break your FD and use it to pay off the debt. The interest saved on reducing the debt could outweigh the loss in FD returns.
- Improved investment opportunities
If you find an investment with higher returns than your FD interest rates, it may be worth breaking the FD early. However, ensure that the new investment aligns with your financial goals and risk tolerance before making this decision.
Conclusion
Breaking an FD prematurely without incurring a penalty is possible, but it requires awareness of the specific rules and exceptions your bank may have. Always weigh the potential loss of interest against the urgency of your financial need. While FDs are a secure investment option, your financial priorities may change, and it is the right time to access your savings for a better opportunity or an emergency.
Always consider speaking to your bank before making any decisions regarding early withdrawal to understand the complete set of terms.