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Business News/ Money / Personal Finance/  As FD rates continue to rise, should you withdraw a current one and start afresh?

As FD rates continue to rise, should you withdraw a current one and start afresh?

As interest rates rise, some investors explore the option of prematurely withdrawing their term deposits. Should they do it?  

SBI recently raised interest rates on its bulk depositsPremium
SBI recently raised interest rates on its bulk deposits

In just one month, Bajaj Finance raised its deposit rates for the second time by 10 basis points.

At the same time, it also reduced the minimum deposit size from Rs 25,000 to Rs 15,000 to attract more depositors. In April also, the lender had raised its deposit rates by as much as 60 basis points.

Bajaj Finance is not an aberration. HDFC Bank also raised its deposit rates for two consecutive months in a row, in January as well as in February.

Investment experts advise investors to spread out their deposits over the next few months to make the most of these rate hikes.

One would wonder if they can prematurely withdraw an existing FD to start a new FD in order to maximise the returns instead of getting tied up to an earlier lower rate.

Although, there does not seem anything nothing wrong in redeeming one FD for starting another, but it is not as straight forward as it seems.

You will lose out on interest for withdrawing it prematurely. To make it worse, the bank would levy some penalty charges. So, overall, your extra income may fall short of the cost you incur in premature withdrawal. This is why, this is not a highly recommended strategy.

“Instead of redeeming one FD for another, it is better to start a fresh term deposit that offers a higher rate of interest. In order to earn 5 or 10 basis points more, you shouldn’t lose pay penalty charges," says Deepak Aggarwal, chartered accountant and financial advisor.

So, what is the way out?

Bank FD laddering

There is a tried and tested technique of fixed deposit laddering. Under this process, an investor is supposed to start a number of FDs maturing at different intervals. For instance, one FD matures in six months or one year, another in two years, the third one in three years, so on and so forth.

This way, you don’t need to bother much about the short-term FDs, which will get renewed and can be locked in for subsequent tenor, perhaps at a higher rate. And as far as long-term FDs are concerned, investors are currently being urged to wait for some more time until the rates rise further.

Renu Maheshwari, investment advisor, cofounder, Finscholarz Wealth Managers, says locking FD for a long duration is not a good idea.

“Interest rate cycle is on upward trajectory for now. How high will the rates go, shall depend on the inflation rate. Locking in for a longer term right now is not a good idea," says Maheshwari.

However, investors must be aware of the fact that if the interest earned on a bank deposit surpasses Rs 10,000 in a financial year, banks are meant to deduct tax at source (TDS) at the rate of 10 per cent on the entire interest income.

The TDS will be reflected in Form 26AS, which can be downloaded or one can get from the bank.


NBFCs pay a higher rate of interest on fixed deposits as compared to regular banks. 
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NBFCs pay a higher rate of interest on fixed deposits as compared to regular banks. 

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Published: 16 May 2022, 02:20 PM IST
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