With RBI aggressively hiking repo rates to counter inflation, many of the banks have also now started passing on the benefit of higher rates to depositors.
While larger banks like SBI, HDFC, ICICI, etc. are nearing 7% in FD interest rates, many of the new and smaller banks are already offering rates from 7.5% to 9.25% per annum! You can check which bank offers highest FD rates as well to know which banks are offering better rates.
Many existing Fixed Deposit holders who have money parked in FDs face the question – Should I break old FD and make new FD at higher interest rates?
There is no one perfect answer to this question. So let’s see how to decide whether to break your FDs or not.
Break old FD and Reinvest in new FD at higher rates?
The answer to this question depends on the following 4 factors –
- Your old FD interest rates
- Remaining tenure of your FD
- Penalty on premature FD closure
- New higher FD rates on offer
Also, another factor can be one’s view about whether FD rates will increase more in near future (<1 year) or not. This is not easy for most people to guess but if you look at historical RBI repo rates and monitor inflation / RBI actions, you will have a fair idea of what is about to happen to a large extent. Not guaranteed but you can still make intelligent guesses on this front.
Given the current scenario, if your FD is maturing in next 12 months (1 year) or lesser, then you can hold it till maturity. There wont be much benefit to break it now, get lower rate, pay penalty, etc.
In general also, if your FD is close to maturity, its better to hold on to it as interest rates will not fall sharply in the near term. So even if your FD matures after a few months, you would get reasonably high FD rates then to lock-in for new FDs you make later.
When you break a FD prematurely, then you lose some interest due to lower interest rate applicable to the actual tenure you had the FD (and not the original tenure you made the FD for). So if you make a FD for 3 years at say 6% but break the FD in 1 year itself, then you will get interest that is applicable for 1 year period at the time of breaking the FD.,
You will also have to pay a penalty (generally around 0.5% to 1%) that banks charge for premature closure of fixed deposits.
So don’t be in a hurry to close your old FDs just because new ones are offering slightly higher rates.
You should opt for premature closure of FD only if there is a large gap between the new FD rates and the effective rates on your existing old FDs (after also accounting penalties), and a sufficiently long time is still left in the tenure of your old FD.
So for example you just made a 4-year FD at 5% few months back and now the new 1-to-4 year FD is giving 7-7.5%, then it makes sense to break the old FD and book a new one of a tenure that you feel is appropriate.
And since FD rates might go up further, it makes sense to not lock in your money in very long term FDs right now. It is best to ladder your fixed deposits to optimize FD returns. Once the FD rates are close to peak (anyone guessing?), only then you should look at locking in the money for long by going for long tenure FDs of several years.
Suggestion – While creating / renewing FDs, divide them into several smaller parts. This is to provide the flexibility to withdraw smaller FDs (and not break one, full large FD) if the fund requirement is of a smaller nature. So if you have to keep Rs 5 lakh in FD, don’t make one FD of Rs 5 lakh. Make it something like this – Three FDs of Rs 1 lakh each; three FDs of Rs 50,000 each; and two FDs of Rs 25,000 each.
Just a reminder that irrespective of what we discussed about FDs, it is also true that FD interest taxation is not investor-friendly and it makes post-tax FD returns very mediocre. If you are willing to accept a bit of risk, one can consider good debt funds as alternatives to fixed deposits. These offer better post-tax returns than fixed deposits due to indexation benefits.
So with that, I hope you now have some answers to your question – Should I break old FD and create a new FD at higher rates in India (2023)?