Fixed Deposits (FDs) are meant to give you stability, predictable returns, low risk, and peace of mind. But sometimes, you may need to access that money early, maybe for an emergency, a big purchase, or to seize a new investment opportunity.
That’s when you might think: “What happens if I break my FD before maturity?”
Let’s decode this, especially how Banks and NBFCs handle it differently.
How it works with Banks
When you open an FD with a bank (like SBI, HDFC Bank, or ICICI), you agree to keep your money locked for a specific period, say 1 year at 7%.
If you break it before maturity, banks typically do two things:
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Recalculate interest for the actual period your money stayed invested, not the original tenure.
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Deduct a penalty, usually 0.5% to 1%, from that applicable rate.
For example, if you booked a 1-year FD at 7% with HDFC Bank but withdraw after 6 months:
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The 6-month FD rate might be 6.25%
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After applying a 1% penalty, you will earn 5.25%
Most banks allow premature withdrawals, except tax-saving 5-year FDs. Some even let you do partial withdrawals, where only a portion of your FD is broken.
How it works with NBFCs
NBFC FDs (like Bajaj Finance, Mahindra Finance, or Shriram Finance) operate differently:
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No withdrawal before 3 months from the start date.
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Withdrawals between 3 and 6 months usually earn no interest.
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After 6 months but before maturity, interest is generally paid at 2% lower than the contracted rate.
For example, if you invested ₹1 lakh in a 2-year FD at 8% with Bajaj Finance:
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Break after 1 year, you might earn 6% interest
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Break before 6 months, you would earn nothing
NBFC FDs offer higher rates to compensate for lower liquidity and stricter withdrawal rules.
Final thought
Breaking an FD, whether with a bank or an NBFC, is not necessarily a financial mistake, but it comes with trade-offs. Banks provide flexibility and easier access to your money, though the returns may be slightly lower. NBFCs offer higher interest rates, but early withdrawal rules are stricter and penalties can be significant.
Before investing, it is important to understand the lock-in period, applicable penalties, and alternative options. Planning ahead ensures you can meet unexpected needs without compromising your returns.
Now, over to you: Would you choose a higher NBFC FD rate knowing the withdrawal rules are stricter? Or do you prefer the flexibility that bank FDs offer even if the rate is lower?