Fixed Deposits (FDs) are a popular way for people to invest because of guaranteed returns on their money and are considered safe. As the name suggests, with FDs, the investment is made for a predetermined period to earn that guaranteed interest rate. But life isn’t always predictable, and you may need to take money out of your FD account before time. In these situations, it may be possible to take money out of an FD early, but knowing the rules and consequences of doing so is important.
When money is taken out of an FD account before the maturity date, this is called the premature withdrawal of a fixed deposit. This can be done in parts or entirety. But banks and other financial institutions may charge fees for early withdrawals, and the interest rate on the deposit may be lower than what was agreed upon at the start.
Here are some rules to keep in mind if you want to take money out of an FD account early:
Minimum Lock-in Period
Most banks and other financial institutions have a minimum lock-in period before which withdrawal can’t be made. Depending on the bank and the type of deposit, this period can be anywhere from 7 days to 10 years. You might have to pay a penalty if you take money out of your FD before the minimum lock-in period.
Penalty Fees
Banks and other financial institutions may charge a fee if a partial or full withdrawal is made from an FD. Depending on the bank and the deposit tenure, the fee could lie anywhere from 0.5% to 1% of the deposit amount. The penalty is usually taken out of the deposit’s main amount when the deposit is withdrawn.
Interest Rate
If an FD is taken out early, the interest rate may be lower than what was originally agreed upon. This is because the bank or other financial institution might change the interest rate depending on the tenure and premature withdrawal. In such situations, the interest earned on fixed deposits that are taken out early may be less than expected.
Tax Consequences
If a withdrawal is made from an FD account early, there may be tax consequences, depending on how long it was held and how long it was held for.
Eligibility
You can’t pull out of all FDs early. Different types of deposits, like tax-saving FDs or Recurring Deposits (RDs), may have different rules at banks and other financial institutions. Before investing, you should carefully read the terms and conditions of the deposit to find out if you can get your money back early.
Documentation
If you want to get your money out of an FD early, you may need to show the original receipt, proof of your identity, and a signed withdrawal form. It’s important to keep these papers safe and handy if you need to get your money out of the deposit before it’s due.
Withdrawing only part of an FD
Banks and other financial institutions sometimes let you take out only part of an FD. This means you can take out some of the money you put into the account while leaving the rest in the account. But if you withdraw only part of your money, you may have to pay a fee and get a lower interest rate.
Renewal
After an early withdrawal from an account, some banks and financial institutions may allow you to renew the deposit. This means you can put the money you took into a new FD account, which may have a higher interest rate or better terms.
Taking money out of an FD early should be one of the last resort and should only be done in an emergency. Before putting money into an FD, it’s important to know the terms and conditions and think carefully about what will happen if you take money out early, such as fees and lower interest rates. If you need money, look into other options, like a personal loan or credit card. If you decide to take money out of your FD before it’s due, follow the regulations set by your bank or other financial institutions.
This includes giving the documents needed and paying any fines that may be due. It is also important to think about any tax consequences of withdrawing money early and talk to a tax expert if necessary.
When it comes to an early withdrawal of FDs, the opportunity cost of the funds is another thing to think about. When you put your money into an FD, you put it away for a certain amount of time in exchange for a guaranteed return. If you take out your deposit before the end of the term, you won’t get the possible return you would have gotten if you had kept the money invested for the full term.
Also, if you take out the deposit and use the money for something else, you might miss out on other ways to invest that could have given you a higher return. For example, if you had put the money into stocks or Mutual Funds (MFs) instead, you might have made more money at the same time. Before you take money out of an FD early, you should think about what you could have done with the money and compare the possible returns to what you could get from other investments. This can help you make a better decision and cut down on any losses.
In summary, premature withdrawal of FDs can be a good option in an emergency, but it is important to know the rules and consequences before making a decision. By carefully considering the fees, interest rates, tax implications, eligibility requirements, documentation needs, and the opportunity cost of the funds, you can make an informed decision and minimize any potential losses.