Fixed Deposits (FD) are popular investment instruments in which you invest a lump sum amount for a fixed period of time and you get fixed rate of interest. Now during the period of investment, the interest rates may fluctuate, but your fixed deposit interest rates would remain lock in at the same rate of interest, the rate at which you invested in. This making them the safest investment option available today.
In order to maximise returns, while it is useful to get high interest rates, it is also a good idea to minimise the cost of unplanned FD closure. Therefore this article explains what is premature withdrawal of FD, what is the interest rate that is applicable on FD which is broken, what is penalty on early withdrawal, what calculations one must do to decide whether to break the Fixed Deposit or not?Alternatives to breaking FD taking loan against it.
What is Breaking of Fixed Deposit?
Breaking a fixed deposit means withdrawing the money before the maturity expires. It is also called as premature withdrawal from Fixed Deposit. This may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere.
Why would people like to break Fixed Deposit?
At times there is emergency but at times to take advantage of higher rate of interest. Many people want to close their old Fixed Deposit account before maturity and open a new account when they see the current interest rates on fixed deposits in the market much higher than rate of interest at which they have opened FD sometime back. The banks,to discourage investors to withdraw FD before maturity, may charge a penalty of 0-4% on the applicable interest rates for the period the FD was with the bank.
What is rate of Interest on the premature withdrawal of Fixed Deposit?
In the event of the FD being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the Bank, with premature closure penalty.
What is the premature closure penalty?
Banks usually levy a penalty in the form of a 0.5-4% lower interest on customers looking to close their Fixed Deposit. Some banks do waive off this penalty, the waiver is given on a case-to-case basis.
For example: If you have FD of KES 165,000, for 3 months, earning an 8% p.a interest. So the total interest you will receive will be KES 3,327.12 over the period subject to deduction of 15% withholding tax. In case the FD is broken after 2 months, considering a penalty of 1.5%,the actual rate applicable will be 6.5% p.a and the total interest received for 2 months will be KES 2,703.29 and not 3,327.12 (8% for 3months). Our Fixed Deposit Calculator helps in calculating the maturity value, interest.
| Principal Amount | Basic rate | Tenure(Days) | Calculated Amount |
|---|---|---|---|
| 165,000.00 | 8% | 92 | 3,327.12 |
Incase of 1.5% penalty,the calculations will be as below.
| Principal Amount | Basic rate | Tenure(Days) | Calculated Amount |
|---|---|---|---|
| 165,000.00 | 6.5% | 92 | 2,703.29 |
Most banks calculate interest rates for premature closure of FDs by the following formula:
Interest Rates for Premature withdrawal of FDs = Interest Rate applicable for actual period of FD as per the rates prevalent at the time of investment – Penalty rate.
In case of FDs with periodic interest payouts, where banks have already paid the investor interest as per the committed rates, banks calculate the applicable penalty at the time of redemption and reduce the final payout by the same effectively reducing the interest rate to the rate as per the above formula.