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5 Things To Know On Penalty For Premature Closure Of FD

mahindra-finance-author

by Mahindra Finance

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March 5, 2024

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5 mins read

Life is full of unexpected twists and turns. Circumstances can change in the blink of an eye, and we may find ourselves in need of funds before the maturity date of our fixed deposit (FD). If you are considering premature closure of your FD, it's important to understand the implications. 

So, what is premature closure of FD? In this blog post, we will explore five crucial aspects of the premature closure of FDs that every rural and semi-urban Indian should know.

1. Calculate the penalty for premature closure of FD

Before initiating premature closure of your FD, we should know what is the penalty on premature closure of FD. Most banks impose a penalty for premature closure of FD before its maturity date. This penalty can vary from bank to bank but is generally a reduction in the interest rate.

Let's take an example to understand this better. Ramesh invested ₹1 lakh in a fixed deposit for two years with an annual interest rate of 7%. However, due to a financial emergency, he needs to withdraw his money after one year. The bank imposes a penalty of 1% for premature closure. In this case, Ramesh would incur a penalty for premature closure of FD amounting to ₹1,000 (1% of ₹1 lakh). As a result, his effective interest rate would reduce from 7% to 6%.

2. Penalty for premature closure of FD: Losing out on interest rate

When you prematurely close your FD, you not only incur penalties but also lose out on the FD interest rate applicable for the remaining tenure. Banks generally do not provide interest for the period after premature closure. While this may seem like a small amount, it can add up significantly when calculated with other charges.

For instance, consider Geeta who invested ₹5 lakhs in an FD for five years with an annual interest rate of 8%. After three years, she decides to withdraw her money. If she lets the FD continue until maturity, she would earn a total interest of approximately ₹2,40,000. However, by prematurely closing the FD, she would lose out on this amount.

3. Penalty for premature closure of FD: Cumbersome procedure

Prematurely closing an FD involves a cumbersome procedure that requires various documents and forms to be filled out. This can be time-consuming and inconvenient, especially during emergencies when you need quick access to funds.

4. Explore other options to avoid penalty for premature closure of FD

Instead of prematurely closing your FD, it's worth exploring other options that allow you to access funds without affecting your deposit. One such option is a Consumer Finance Loan provided by financial institutions. 

Let's consider the case of Rani who had invested ₹3 lakhs in an FD for three years at an annual interest rate of 7%. She suddenly faces a medical emergency and needs immediate funds. Instead of going for premature closure of tax saver FD and losing out on interest income, Rani applies for a Consumer Finance Loan from her bank. This way, she can meet her medical expenses without hampering her investment growth.

5. Tax implications as a penalty for premature closure of FD

Premature closure of a tax saver FD can have tax implications. Tax saver FDs come with a lock-in period of five years, during which you cannot withdraw the funds without incurring penalties. Additionally, the interest earned on tax-saver FDs is subject to taxation.

Suppose Varun invested ₹1.5 lakhs in a tax saver FD for five years at an annual interest rate of 7%. He decides to prematurely close it after three years due to a financial emergency. In this case, he would not only incur penalties but also face potential changes in his tax liabilities as the TDS amount may be recalculated based on the reduced interest rate applicable for premature withdrawals.

Conclusion

Before considering premature closure of your FD, it's crucial to understand the penalty for premature closure of FDs. Calculate the penalty for premature closure of FD charged by the bank, assess the impact on interest earned, and consider alternative options like Consumer Finance Loans.

Remember that prematurely closing your FD may result in financial losses, inconvenience, and even tax implications. By making thoughtful choices and exploring alternatives like those offered by Mahindra Finance, you can meet your financial needs without sacrificing long-term growth. So take control of your finances and make informed decisions that work in your favour.

FAQs

Q: What is premature closure of FD?

Fixed deposits allow the depositor to close an FD before the date of maturity arrives. This is called premature closure of FD.

Q: What is the penalty on premature closure of FD?

A: The penalty for premature closure of FD varies from bank to bank but generally involves a reduction in the interest rate. It's important to calculate this penalty before closing your FD to avoid any unexpected losses.

Q: Can I prematurely close a tax saver FD?

A: Tax-saver FDs come with a lock-in period of five years, during which premature closure is not allowed without penalties. It's advisable to consider alternative options if you need funds before the completion of the lock-in period.

Q: What is the impact of premature closure on future loan eligibility?

A: Premature closure of FDs may impact your eligibility for future loans as banks consider your financial stability and creditworthiness. Maintaining FDs until maturity can contribute to a positive credit profile and improve your chances of securing favourable loan terms.

Q: How can Mahindra Finance help with the premature closure of FDs?

A: Mahindra Finance offers alternative financing options like Consumer Finance Loans that allow you to access funds without closing your FD prematurely. This way, you can meet your immediate financial needs while preserving the growth potential of your investment.

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