People have trusted Fixed Deposits (FD) for years because they offer low-risk and guaranteed returns. Another big advantage of FD is that if needed, you can break it before time through pre-mature withdrawal. However, there are some disadvantages to breaking FD. While on the one hand, you get less interest, banks also charge a penalty. Penalty rates are different in different banks, which usually range from 0.5% to 1%. This penalty is levied on the interest received, not on the total deposit amount.
On breaking FD before time, interest is given at the card rate instead of the booked rate. If you are breaking FD before time, then you will not get the effective interest rate at which the FD account was opened. In banking language, this is called booked rate. On breaking FD, interest is given at the card rate instead of the booked rate. Card rate means that the interest rate that the bank is giving on the FD for the period after which the FD is broken will be the same.
How much loss will you incur if you break a 5-year FD in a year?
For example, if you made an FD of Rs 1 lakh for 5 years, the interest rate of which was 7%. The interest rate of a one-year FD of the same bank is 6%. Now if you break a five-year FD in a year, you will get interest at the card rate (6%) set by the bank for that one year. Along with this, you will also have to pay a penalty of 1%, due to which your effective interest rate will be only 5%. If you had kept the FD for five years, you would have got interest at the rate of 7%, which would have given you a profit of Rs 7000. But on premature withdrawal, you will get only Rs 5000, which will result in a loss of Rs 2000.
How to avoid loss
To avoid breaking FD, you can make multiple FDs in small amounts instead of one big FD. By doing this, when you need money, you can fulfill your need by breaking only some FDs, and your interest in the remaining FDs will be safe.
