Understanding FD Breaking Charges: Costs and Considerations
Fixed Deposits (FDs) are a popular savings tool in India due to their guaranteed returns and safety. However, there are situations where you might need to access the funds before the FD matures. This is referred to as breaking the FD. While breaking an FD is possible, it often incurs penalties, which can affect the overall returns you receive. Here’s a closer look at FD breaking charges and how an FD works.
What are FD Breaking Charges?
FD breaking charges are penalties for withdrawing your money before the end of the tenor. These charges can vary between banks and NBFCs. They usually include:
- Penalty on Interest: A reduction in the interest rate.
- Premature Withdrawal Fee: A fixed fee for early withdrawal.
Understanding these charges is important before deciding to break your FD.
Penalty on Interest
When you break an FD early, the issuer may reduce the interest rate. This is known as the penalty on interest. The revised interest rate is usually lower than the original rate. It is often the rate applicable for the period the FD was actually held.
Example:
Suppose you have an FD with a 7% p.a. interest rate for 3 years. If you break it after 1 year, the issuer may reduce the interest rate to the 1-year FD rate, say 5% p.a. So, you will earn interest at 5% p.a. instead of 7% p.a.
Premature Withdrawal Fee
FD issuers may also charge a premature withdrawal fee. This is a fixed amount deducted from your principal or interest earned. The fee can vary from one bank to another.
Example:
If the premature withdrawal fee is 0.5% of the principal, and your FD amount is ₹1,00,000, the fee will be ₹500.
Factors Affecting FD Breaking Charges
Several factors can affect FD breaking charges:
- Tenor of the FD: Longer tenors may incur higher penalties.
- Interest Rate: Higher interest rates may have higher penalties.
- FD Issuer’s Policies: Different institutions have different penalty structures.
It is important to check these factors before investing in an FD.
How to Calculate FD Breaking Charges
Calculating FD breaking charges involves two steps:
- Revised Interest Calculation: Calculate interest at the reduced rate for the period the FD was held.
- Deduct Premature Withdrawal Fee: Subtract the fixed fee from the principal or interest earned.
Example:
Suppose you have an FD of ₹1,00,000 at 7% p.a. for 3 years. You break it after 1 year. The revised interest rate is 5% p.a., and the premature withdrawal fee is 0.5%.
Revised Interest Calculation
Interest Earned = ₹1,00,000*5%*1
Interest Earned = ₹5,000
Deduct Premature Withdrawal Fee
Fee = ₹1,00,000*0.5%
Fee = ₹500
Net Amount Received
Principal + Interest Earned – Fee
Net Amount = ₹1,00,000 + ₹5,000 − ₹500
Net Amount = ₹1,04,500
So, you will receive ₹1,04,500 instead of ₹1,07,000 (original amount with interest).
Common Reasons for Breaking an FD
Despite the penalties associated with breaking an FD, there are several common reasons why individuals might choose to do so:
Medical Emergencies
Unexpected medical expenses can arise, necessitating immediate access to funds. Breaking an FD could provide the required liquidity to cover hospital bills and treatment costs.
Financial Urgencies
Sudden financial needs, such as paying for higher education, urgent home repairs, or any other unforeseen expense, could compel individuals to break their FD.
Debt Repayment
If an individual has high-interest debt, it might be financially prudent to break the FD and use the funds to pay off the debt. This is especially if the interest on the debt is higher than the penalty for premature withdrawal.
Investment Opportunities
Occasionally, an attractive investment opportunity may arise that promises higher returns than the FD. In such cases, breaking the FD to invest in this new opportunity may be beneficial, despite the penalties.
Better Interest Rates
Interest rates fluctuate, and sometimes, new FDs might offer significantly better rates than the existing ones. Investors might choose to break their current FD to take advantage of these higher rates, although this should be carefully evaluated against the penalties.
Personal or Family Events
Life events such as weddings, the birth of a child, or other significant family functions might require a substantial outflow of funds, prompting the breaking of an FD.
Change in Financial Goals
Over time, financial goals and priorities can change. For instance, an individual may decide to purchase property or make a significant lifestyle change that requires accessing the funds tied up in an FD.
How to Minimise FD Breaking Charges
Here are some tips to minimise FD breaking charges:
Loan Against FDl
Pledge the FD as collateral to access funds. Here, you are provided up to a certain percentage of the deposit as a loan.
Partial Withdrawal
Book an FD with issuers allowing partial withdrawal without breaking the entire FD.
Shorter Tenors
Opt for shorter tenors if you foresee the need for funds.
Sweep-in Facility
Use the sweep-in facility to link your FD to your savings account. This allows partial withdrawal without penalties.
Emergency Fund
Maintain an emergency fund to avoid breaking FDs for urgent needs.
Things to Consider Before Breaking an FD
Before breaking your FD, consider the following:
Financial Impact
Assess the financial impact of breaking the FD. Consider the loss of interest and penalties.
Alternative Sources
Explore alternative sources of funds, such as a personal loan. An overdraft may also be cheaper.
Reinvestment Options
If you are breaking the FD for better returns, evaluate the new investment. Ensure it outweighs the loss and penalties.
FD Issuer’s Policies
Check the bank or NBFC’s policies on premature withdrawal and penalties.
FD Breaking Charges of Banks and NBFCs
Different banks have different policies on FD breaking charges. Here are some examples:
| Bank | Penalty on Interest |
| State Bank of India (SBI) | 0.5% to 1% |
| Bajaj Finance | 2% |
| HDFC Bank | 1% |
| ICICI Bank | 0.5% to 1.5% |
| Shriram Finance | Up to 3% |
Note: The charges mentioned here are subject to change at the issuer’s discretion.
It is essential to check the specific policies of your bank or NBFC before investing.
FDs are a safe and popular savings tool. However, breaking an FD before maturity can incur charges. These charges include penalties on interest and premature withdrawal fees. Understanding these charges and considering alternatives can help you make informed decisions. Always check the bank’s policies and calculate the impact before breaking your FD.
