Fixed deposit (FD) accounts constitute the most popular form of investment in India. Investors can considerably grow their savings by reinvesting their FD returns. However, financial emergencies can never be foreseen; and individuals often choose to break their FDs before their maturity dates to attend to these emergencies.
What are the consequences of a premature fixed deposit withdrawal?
- Banks reduce the FD interest rate for customers who opt for an early withdrawal: The customer must bear certain charges after opting for a premature fixed deposit withdrawal. While these charges depend on the bank booking the FD for the customer, one of the direct consequences of premature withdrawal is a reduction in the FD’s interest rate. The bank in question can reduce their FD interest rate by 0.5-1% for the individual opting for a premature withdrawal. Banks take this step to compensate for their loss due to the early withdrawal. Customers must carefully read the terms and conditions of the FD agreement to know about this reduced rate before booking their FD.
- The customer cannot benefit from compounding interest: Customers can grow their savings by reinvesting their FD returns and earning higher interest. This practice grows their income thanks to the power of compounding. However, when a customer breaks their FD prematurely, they lose a portion of their interest that they would have earned if they had kept investing in the FD until maturity. Customers must develop the habit of using an online FD returns calculator to calculate their returns on maturity. Doing so can also help them estimate their losses while considering a premature withdrawal.
- A premature withdrawal impacts the customer’s tax liabilities: Customers must note that the taxation rules of fixed deposit accounts change in the case of a premature withdrawal. The interest received on maturity is generally subject to capital gains tax and TDS (tax deducted at the source) by the bank. However, if the customer chooses to prematurely break their FD, the TDS is adjusted based on the reduced interest rate applicable to premature withdrawals. A premature FD withdrawal could, therefore, lead to a recalculation of one’s TDS amount.
- The individual’s loan eligibility, too, could be affected: Most fixed deposit accounts, like the ones offered by IndusInd Bank, offer the facility of loan against FD. FDs can, therefore, be pledged as collateral. Hence, premature withdrawals can lead to the individual’s creditworthiness taking a hit. Banks analyse an individual’s credit history while assessing loan applications; and having a premature withdrawal history could raise concerns about the individual’s capacity to manage financial commitments.
Practices that can help one avoid opting for a premature withdrawal:
Here are some practices that can help avoid breaking an FD investment before maturity:
- Plan in advance: Planning one’s FD investments well in advance can help investors adopt the “laddering” strategy that can help them increase their returns and benefit from higher liquidity. This approach requires the investor to spread their investment amount across multiple FDs with staggering maturity periods.
- Calculate one’s savings early: Using an FD returns calculator can help investors estimate their FD returns on maturity. While investing, if they foresee any expenses coming soon, they must account for that expense and invest a lesser amount.
- Building an emergency fund: Having a sufficient emergency fund can help one tend to any financial emergency without worrying about breaking their fixed deposit investments.
Conclusion
The consequences of a premature FD withdrawal include – a reduction in FD interest rates, a break in the compounding of interest, a recalculation of TDS, and a negative impact on the individual’s creditworthiness. Today, banks offer higher rates of interest to help customers grow their wealth. IndusInd Bank’s online fixed deposit accounts also offer benefits like a flexible tenure and an auto-renewal option.
Website of Source: https://www.indusind.com
Source: Story.KISSPR.com
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