Breaking your FD, Know How Interest is Calculated?

Let us tell you how the interest is calculated on premature fd when the FD is broken and how the penalty affects your money.
Image Credit: Paisabazaar.com
Image Credit: Paisabazaar.com

Even today, fixed deposits are the most popular. The main reason for this is low risk and fixed return. Another big advantage of this is that it provides the facility to withdraw money even before time, on which some penalty has to be paid. This facility is of great benefit to those who are facing money problems during the Corona period. But if you are also withdrawing your FD money ahead of time, then you should know two special things. The first is how banks calculate interest on the money being paid to you and second, how the penalty on that money affects the money you get.

How is Interest Calculated?

When calculating interest on fixed deposits, banks pay interest based on when you are breaking the FD, not the rate at which you opened the FD. For example, suppose you made an FD of Rs 1 lakh at the rate of 7% for 1 year, but you break it only after 6 months. At 6 months FD, the interest rate is rising to 6.5 per cent. In such a situation, the bank will pay interest on your money at the rate of 6.5 per cent and not at the rate of 7 per cent.

Penalty for Breaking FD

Image Credit: SVC Bank
Image Credit: SVC Bank

Different banks charge different penalties for breaking FDs. For example, the State Bank of India takes a penalty of 0.5%, then HDFC Bank takes a penalty at the rate of 1%. Now understand this from the example above. If you broke your FD of Rs 1 lakh in 6 months instead of 1 year and you were to get 6.5 per cent interest on it, then the penalty rate will also be reduced from your interest. That is, the interest rate will be reduced by 0.5 per cent in the case of State Bank of India and 1 per cent in the case of HDFC Bank. That is, instead of 6.5 per cent interest, you will get only 5.5 per cent interest, whereas you had paid 1 year FD for 7 per cent interest. In this way, the money you get will be reduced as soon as the penalty is imposed.

So What Needs to be Done?

Image Credit: Citibank
Image Credit: Citibank

In such a situation, if you feel that you may have to break the FD ahead of time, then read the bank's terms and conditions carefully while making the FD. See how much penalty the bank is charging you. In such a situation, if you feel that you may have to break the FD in the middle, then it would be good to avoid the penalty, that you make a short time FD and invest it again in another FD if you do not need the money.

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