Making this mistake with a 5-year FD will result in a huge loss! If you deposit ₹5 lakh, you're guaranteed to lose ₹1.38 lakh..

Post Office Tax Saving FD Premature Closure Rule: Generally, there are no tax benefits on fixed deposits, but if you have invested in a 5-year FD, you can avail tax benefits under Section 80C. Such FDs are called tax-saving FDs or tax-free FDs. If you have invested in a 5-year FD at the post office, do not make the mistake of breaking it prematurely. In such a case, you will face a double blow. You will lose the tax benefit, and you will also suffer a significant loss in interest. Here's how much a ₹5 lakh FD will cost you in losses.

Understand the rules for premature closure of a 5-year FD
A 5-year Term Deposit (TD) or FD account at the post office cannot be closed before the completion of 4 years from the date of deposit. If the account is closed after 4 years for any reason, interest will be paid only at the rate of a Post Office Savings Account. Any interest already paid at the TD rate will be recovered and deducted from the deposit amount and the interest due.

Now, understand the calculation.
Let's say you have invested in an FD of ₹5,00,000. The post office is offering 7.5% interest on this FD. In this case, if you let it mature completely, it will earn you a good return. On a ₹5,00,000 FD, at an interest rate of 7.5% over 5 years, you will earn ₹2,24,974 in interest alone. That is, you will receive ₹7,24,974 on maturity.

Now see the loss from premature withdrawal.
Now, if you want to withdraw it prematurely, according to the rules, this can only be done after 4 years. If you withdraw it after 4 years, you will get interest equivalent to a savings account. Post office savings accounts offer a 4% interest rate, so on an amount of ₹5,00,000, you would only earn ₹86,289 in interest. This means after 4 years, you would only receive ₹5,86,289.

A direct loss of ₹1.38 lakh
Now, compare this: where you could have earned ₹2,24,974 in interest after 5 years, breaking the FD after 4 years will only yield ₹86,289 in interest. This results in a direct loss of ₹1,38,685.

Tax benefits will also be lost.
This is just the financial loss; the other loss will be in terms of taxes. If you break a 5-year FD before maturity, your tax claim under Section 80C will be disallowed. In this case, that amount will be added to your current income, and you will be taxed according to your tax bracket.

Let's understand with an example
Suppose you opened an FD in June 2021 and claimed a tax deduction of ₹1.5 lakh on your annual income under Section 80C that same year. Now, due to some need, you break it after 4 years, in July 2025. In this case, the ₹1.5 lakh you saved on income tax will be added to your 2025 income. You will then be taxed according to your tax bracket. This way, you will suffer a double loss on this FD.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.