Fixed Deposits are one of the most popular savings products in which an investor deposits lump-sum amount for a fixed period of time at a fixed rate of interest. What is important to understand is that while the interest rates may fluctuate, the interest rate on your fixed deposit will stay locked at what it was at the time of opening the account.
There may emerge several situations, where the investor may need to break his fixed-deposit ahead of its maturity date. These situations are typically emergency situations, where the investor requires immediate liquidity for personal or business needs. An investor may also be tempted to break the FD in a situation where prevailing interest rates on Fixed-Deposits are much higher than the rate at which he created the Fixed Deposit and hence, the investor wants to move to a higher rate FD account.
However, while RBI regulations allow customers to break their FDs pre-maturely, it also allows banks to charge penalty from their customers on breaking FDs before maturity. Typically, in a bid to discourage customers from breaking pre-mature fixed deposits, banks may charge a penalty of 0-1% on the applicable interest rates. Some banks even go to the extent of allowing interest rate equivalent to the prevalent rate of 1 year FD even on FDs of longer tenure, in case of pre-mature withdrawal.
The difference between 1 year FD and five year FD can be high as 3 percentage points, thus resulting in a significant loss for the investor. Some banks also prescribe minimum lock-in-period of a few months to a year, before which breaking of a Fixed Deposit is not allowed.
Hence, an investor, while taking a decision to break a deposit needs to calculate the associated costs. In normal circumstances, it shall be advisable to limit the decision to break Fixed Deposits to a situation of dire emergency or to a situation where the investor expects to return a higher return on the funds realized from breaking a FD even after incorporating the associated penalties on pre-mature withdrawal.
The customer may also evaluate the option of taking Loan against FDs if he needs funds only for a brief period of time and is not too keen to pay a heavy penalty on breaking his FDs.
Once you decide to break a FD, the process of breaking the fixed deposits is pretty simple and quick. There may be minor variations in the procedure for PSU and private banks or for FDs created online vs. offline.
At the time of creating a fixed deposit, banks issue a receipt of fixed deposits against which you can get a fixed deposit certificate issued from a bank. You can use the same deposit certificate to request the bank officials to break your Fixed Deposit.
You will need to write an application mentioning the reason to break your fixed deposit along with your account deposit number. You will also need to fill the form for pre mature withdrawal of FD.
Further to this, the bank officials can process this request immediately by clicking on a reversal entry in their system.
In case of fixed deposits created online from your internet banking account, majority of the banks would allow online breaking of your Fixed-Deposit.You need to go to the “service request” section of your net banking and can fill a request to break your fixed deposit before maturity online in the Fixed-Deposits section. For the banks which do not provide an option of online withdrawal, you will need to follow the process of offline breaking of Fixed-Deposit as mentioned above.