Rishika Mantri was facing a financial crisis. Her mother met with an accident in Jaipur and was in the hospital. Rishika had to pay the hospital bills. She did not have much in her savings account. She had a fixed deposit (FD) to her name, which could cover the costs. But the deposit still had one year to maturity. Rishika was thinking of breaking it. But she did not know how to go about it. What was she to do?

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Breaking an FD is easy if you know the procedure.

Here is a step-by-step guide to help you out:

Step 1: Make a request to break the FD

The first step is intimating the financial institution. Banks, companies, and non-banking finance companies (NBFCs) offer FDs. It does not matter where you have your FD. Start by letting the financial institution know that you wish to break your FD.

Step 2: Break the FD online or offline

Do you want to break the FD offline? Then you have to fill in a request form and submit it to the issuing institution. The institution will process your request and credit the funds. What if you choose the online medium to break your FD? You can do so using your bank’s net banking facilities. This process is the same for FDs with companies or NBFCs. Log into your account and make a request. You will then have to fill and submit an online request form.

Step 3: Understand the interest calculations

When you break your FD before maturity, it is a premature withdrawal. Such a withdrawal results in a lower interest rate. Here, the financial institution calculates the interest in a different way. It considers the number of days for which you held the deposit. It then applies the rate of interest applicable for such a tenor. For instance, suppose a two-year deposit has an interest rate of 7%. Meanwhile, a three-year FD has an interest rate of 8% . Say, you have a three-year FD. It should earn interest at the rate of 9%. But you need to break the FD after two years. Then you will earn interest at the rate of 8% instead.

Step 4: Pay the penalty

Financial institutions levy a penalty charge in the case of premature withdrawal. This penalty fee may be between 0.5% and 1%  of the deposit amount depending on the banks or NBFC’s.

Points to remember

  • Banks and NBFCs now offer FDs that have no premature withdrawal penalty. So, you can break your FDs before maturity without paying a penalty. Find out if your FD has this feature.
  • Rather than break the FD before maturity, you can take a loan against your FD. Banks and NBFCs allow loans against securities. You can pledge your FD for a loan against its value. This way, you avoid paying penalties on premature withdrawals. You also continue to earn at a higher FD interest rate.

Rishika now understood the steps involved in breaking her FD. She followed the steps and availed the funds needed for her mother’s treatment. You too can use this option without much hassle in an emergency.

8% and 9% seem rather high given current FD rates.

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