We all must have heard the quote ¡°Uncertainty is the only certainty in life.¡±?And when it comes to a medical emergency or any other sudden big-ticket expense, breaking our bank FD is often one of the first ways to meet financial shortfalls.
But have you ever wondered how the interest on your bank fixed deposit gets calculated when you do premature withdrawal??Do you get the same interest rate as applicable on opening the FD, or not? Is there any penalty levied on breaking your FD?
Let's decode this for you.
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Upon prematurely closing your bank FD, banks levy a penalty by deducting a certain percentage from your 'effective' interest rate.?
The penalty usually is around 0.5%-1%. As far as the ¡®effective?interest rate¡¯ is concerned, it is generally the lower of the original booked FD rate or the FD card rate applicable at the time of opening the FD for the corresponding period for which the FD remained in effect.?
For example-?Assume you had opened an?FD?amounting to Rs 50,000 at a booked rate of 6% p.a. for three years (compounded quarterly), and the bank levies 1% penalty on premature withdrawals. In case you had to withdraw the money by breaking your FD on completion of 1 year, the bank would deduct 1% rate either from your card rate on the date of deposit, corresponding to the one year effective period of deposit(assuming the one year FD card rate as 5% p.a.), or the contracted FD rate for the entire original three-year tenure (6% p.a.), whichever is lower.??
Implying, in this case, your FD closure amount for the one year for which FD was kept, would be??52,547?(5% p.a.), instead of?? 59,781?which you would have accumulated at the original FD rate of 6% p.a. in case of completion of FD¡¯s three-year tenure.?
So, the next time you think of breaking your bank FD, understanding this mechanism will make you better positioned to understand the penalty (if any) and the applicable effective interest rate that you will fetch on it.?
Also, before breaking the FD, it's better to contact your concerned bank and enquire about the penalty, FD closure amount, and effective interest rate so that you have a fair idea about how much money your fixed deposit would fetch upon premature closure.
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