Breaking fixed deposits prematurely? Here's what it can cost you, financial expert explains

She didn’t lose money in the stock market—but in fixed deposits. ₹25,000, gone in a single day. It sounds unbelievable, but Abhishek Walia, a chartered accountant and financial advisor, shares this real-life case as a cautionary tale about using the wrong financial tool for emergencies.

“One of my clients had to urgently arrange funds for her father’s surgery,” Walia recalls. “She broke four fixed deposits that were still over 1.5 years from maturity. The result? She lost ₹25,000—not in principal, but in penalties, lower interest, and missed compounding.”

FDs are not emergency funds

Fixed Deposits (FDs) are popular for being safe and predictable, but they are not designed for sudden withdrawals. They come with lock-in periods, and breaking them prematurely triggers a chain of losses.

“People often assume that FDs are easily accessible, but that’s only half true,” says Walia. “What they overlook is the financial impact of pulling out money before maturity.”

When an FD is broken early, banks usually apply:

A lower interest rate, applicable to the actual period the FD was held

A penalty, typically ranging from 0.5% to 1% on the interest

Missed compounding, where future interest on the already-accrued interest is lost

These factors combined can create a significant gap between what you expected and what you actually receive.

What should she have done instead?

Walia emphasizes the importance of having a dedicated emergency fund: “FDs are for wealth preservation, not for sudden liquidity. For emergencies, liquidity should be the top priority.”

Here’s the emergency plan he recommends:

> Keep at least 6 months' worth of expenses in a liquid mutual fund or a sweep-in FD, which gives better flexibility > Automate monthly contributions to this fund > Link this to a separate emergency savings account—not your primary account > Consider a medical credit card with zero interest for short tenures as a backup

“These instruments are designed to offer quick access without hurting your long-term savings,” he adds.

Understanding premature withdrawal terms

Some FDs allow premature withdrawals, but the terms vary widely between banks. While certain banks offer this facility with no penalty, most charge a fee between 0.5% and 1% on the applicable interest rate.

“If you break the FD within 7 days of booking, you might not even receive any interest,” says Walia. “People assume they’ll at least get something, but it’s all in the fine print.”

How the penalty works

Let’s say you booked a 3-year FD at 7% interest, and break it after 1 year. If the 1-year FD rate at that time was 6% and the bank charges a 1% penalty, you will earn only 5% interest, not 7%.

That difference, when applied to a large amount, can significantly reduce your final payout.

Investors should note

“Choose the right instrument for the right goal,” Walia stresses. “Emergency funds need flexibility. Don’t sacrifice long-term returns for short-term needs. Plan better so you never have to break wealth-building tools in crisis.”