Investments: Breaking fixes deposits early

Adhil Shetty Posted online: Thursday, Oct 31, 2013 at 0000 hrs
Like most government employees, Iyer isnít much of a risk taker when it comes to investments and has mostly believed in saving with banks. However out of the blue, a situation arose when he needed to pay a lump sum for his sonís summer programme abroad. Breaking one of his FDs prematurely seemed to be the only way out.

Fixed deposits

In India, a fixed deposit (FD) is one of the most common instruments of investment where a person invests a substantial amount for a stipulated time period and gets a fixed rate of interest. In an FD, the rate of interest remains locked for the duration of the investment. When under an emergency, you need a large sum of money, the only solution could be breaking the FD prematurely. This implies withdrawing the money before maturity. Such a repayment of fixed/term deposit before maturity is permissible as per the guidelines set by the RBI.

Downside of premature withdrawal

Banks discourage investors from breaking FDs prematurely. They are permitted to penalise the investor by 0-1% on the rate of interest applicable on the FD for the period the deposit is held by the bank, according to RBI guidelines.

Different banks work on different guidelines to process a premature withdrawal. For example, in case of HDFC Bank, the interest rate applicable for premature withdrawal is lower than the base rate for the original/contracted tenure for which the deposit has been booked, or the base rate applicable for the tenure for which the deposit has been in force with the bank.

For ICICI Bank, for the amount of deposit amount remnant after the partial withdrawal, the rate of interest is reset at the rate applicable for the amount of money remaining, for the original term period, as existing on the date of the opening of the fixed deposit.

Notably, in case of an FD being prematurely shut to facilitate reinvestment into another scheme of fixed/term deposit, there would be a penalty on the deposit as prescribed by the bank on the date of opening of the deposit and the interest will be paid for the term the deposit has been held by the bank. The rate of interest prevailing on the date of re-investment of fixed/term deposit will be applicable for the new term deposit as well.

One should resort to premature withdrawal of an FD only in extreme cases. Lenders like Axis Bank provide flexi options on significant features like tenure, payment instructions, maturity instructions, principal, rollover principal, etc.

However, if the term deposit is close to maturity, it is recommended that you continue with it and reinvest the amount only after maturity. Consider breaking an FD only when it is relatively new.

An alternative to breaking a fixed/term deposit is taking a loan against the FD, in which case the net rate of interest is simply 1-2% on the loan. This makes it much cheaper than a personal or a credit card loan. However, under no circumstances can the tenure of the loan exceed the term of the deposit. In fact, certain banks clearly specify that they can use any other deposit of the investor to settle the dues of the loan in case of default.

The writer is CEO of BankBazaar.com