If You Break a 5-Year FD Before Maturity, You Will Face a Double Blow – Know the Full Cost Before You Act

Fixed Deposits (FDs) are among the safest and most popular investment options in India. But what happens if you break a 5-year FD before maturity? Many people are unaware that breaking a fixed deposit prematurely doesn’t just cost you a penalty — it could also mean a big cut in your returns. In fact, it can result in what we call a “double blow.” Let’s break it down in simple terms.

When you lock your money in a 5-year Fixed Deposit, you expect safety, steady interest, and full returns. However, emergencies can force you to withdraw the funds earlier than planned. If you do, be ready to face not just one but two major financial consequences — an interest rate penalty and a reduced interest payout based on a shorter term.

Break a 5-Year FD Before Maturity

Feature	Details
Topic	Breaking a 5-year Fixed Deposit (FD) before maturity
Penalty	0.5% to 1.5% interest rate deduction (varies by bank)
Interest Recalculation	Interest paid as per applicable shorter-term rate, not the booked 5-year rate
Double Blow Explained	Penalty + lower interest rate applied retroactively
Alternatives	Loan against FD, partial withdrawal (if allowed), overdraft

Breaking a 5-year FD before maturity might seem like a quick fix in times of financial crunch, but it often results in lower interest earnings and penalty deductions. That’s a double blow that could cost you thousands of rupees. Instead, consider loan or overdraft options, or better yet, build an emergency fund to avoid such situations.

What Happens When You Break a Fixed Deposit Before Maturity?

Most banks in India allow you to withdraw your FD prematurely, but they do not encourage it. Here’s what usually happens:

1. You lose the promised interest rate.
   • Suppose you booked a 5-year FD at 7% interest.
   • You withdraw it after 2 years.
   • The bank now pays you only the interest rate applicable for a 2-year FD at the time you booked it — say, 6%.
2. You pay a penalty on top.
   • Most banks charge a penalty of 0.5% to 1.5% on the applicable interest.
   • So instead of 6%, you may end up earning just 5% or 5.5%.

This means your total earnings are significantly lower than expected — a double loss.

see also: Additional Tax Exemption is Available on Post Office Savings Account – This is How You Can Avail the Benefit

Real-World Example: How Much Will You Lose?

Let’s say you invested ₹1,00,000 in a 5-year FD at 7% interest, expecting a return of around ₹1,40,000 at maturity.

But you withdraw after 2 years. Here’s how it breaks down:

• Applicable 2-year rate at the time of booking = 6%
• Less penalty = 1%
• Effective rate = 5%

You earn interest = ₹1,00,000 x 5% x 2 = ₹10,000

Instead of the ₹40,000 expected over 5 years, you’ve earned only ₹10,000. That’s a loss of ₹30,000.

What Are the Penalty Rules by Different Banks?

Each bank has its own policy. Here are a few examples:

ICICI Bank

• Penalty: 0.5% to 1.5%

SBI (State Bank of India)

• Penalty: 0.5% for FDs up to ₹5 lakh, 1% above ₹5 lakh

HDFC Bank

• Penalty: 1% on applicable rate

Ujjivan Small Finance Bank

• Penalty: 1% if withdrawn before 6 months; none after

Always check the specific terms of your bank before deciding.

Alternatives to Breaking an FD Prematurely

If you’re in urgent need of cash, consider these smarter options:

1. Loan Against FD

• Banks offer loans up to 90% of your FD value.
• Interest is usually 1.5% to 2% above the FD rate.
• You avoid breaking the FD and continue earning interest.

2. Overdraft Facility

• Works like a short-term credit line using your FD as collateral.
• Flexible and faster than personal loans.

3. Partial Withdrawal (If Allowed)

• Some banks allow you to break only a part of your FD.
• Penalty applies only on the withdrawn portion.

4. Emergency Fund Planning

• Always maintain a separate emergency fund in savings or liquid mutual funds to avoid early FD closure.

How to Minimize Loss if You Must Break the FD

If breaking the FD is your only option:

• Break the FD close to a tenure slab (like 1 year, 2 years) to get a slightly higher applicable interest.
• Use online FD calculators to estimate post-penalty returns.
• Compare the post-penalty amount with alternatives like loans or credit cards.

You can use this FD Premature Withdrawal Calculator for free.

see also: Post Office’s Most Popular Scheme: Become the Owner of ₹35 Lakhs by Depositing ₹35 Daily

Break a 5-Year FD Before Maturity FAQs

Q1. Can I withdraw my FD before maturity without any penalty?

Some banks like Ujjivan SFB waive penalties under certain conditions. But most banks do charge a penalty.

Q2. Will I lose my principal amount if I break the FD early?

No. Your principal is safe, but your interest earnings will be lower due to recalculation and penalty.

Q3. Is taking a loan against FD better than breaking it?

Yes, in most cases. You keep your FD intact and still get liquidity. It’s more cost-effective than early withdrawal.

Q4. How much penalty will I pay?

Penalty ranges from 0.5% to 1.5%, depending on your bank and FD amount.

Q5. Are tax-saving 5-year FDs allowed to be broken?

No. Tax-saving FDs have a lock-in of 5 years and cannot be withdrawn prematurely.