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Post office schemes mean security and guaranteed returns. With this confidence, lakhs of people invest their hard-earned money in Post Office Time Deposit (POTD), i.e., FD. Especially a 5-year FD, because it gives the benefit of saving tax along with good interest. We all invest money thinking that after 5 years a good amount will come in hand.

But difficulties and needs in life do not come with any warning. Many times, we need to break our investment before maturity. If you are also thinking of breaking your 5-year post office FD before time, then wait! First, understand the complete math of its rules and the loss caused by it; otherwise, you will lose thousands of rupees.

What is the rule for breaking a 5-year post office FD?

You cannot break your 5-year FD in the first 4 years under any circumstances (no matter how much penalty is levied). If you break it between the completion of 4 years and the end of 5 years, you will not get 7.5% interest. You will get interest only at the rate of 4% (the current rate of a post office savings account). In the meantime, any interest already paid on the deposit will be recovered from the repayment amount of the deposit and the interest payable. Investors need to know that a 5-year post office TD now comes with an almost impenetrable lock-in for the first 4 years.

The biggest shock: What will happen to the 80C tax benefit?
The loss of interest is just one aspect. The real and biggest shock you get is on the tax front. What the rule says is that a 5-year post office TD is eligible for tax exemption under Section 80C of the Income Tax Act. But this exemption is available on the condition that you keep your money locked in for a full 5 years. If you break your FD anytime before the completion of 5 years, the tax exemption you got on it in the year you invested will be taken back.

What does this mean?

The tax you saved by showing investment in an FD will be added back to your income in the year you break the FD, and you will have to pay tax on it as per your tax slab.

So is breaking the FD the only way?

Breaking a 5-year post office FD is a very expensive deal. Not only does it cause you to lose interest, but you also lose the tax benefit. Therefore, always consider it as a last resort. If you need money, first look for other options.

This is the rule for breaking the rest of the FDs

- According to the information given on the post office website, you cannot break the FD before six months. If a 1/2/3-year TD account is closed after six months, but before the expiry of one year from the date of deposit, then the interest applicable on the post office savings account will be given for the entire months. If 4 percent interest is given on a savings account in the post office, then the same interest will be given to you.

- If a 2/3-year TD account is closed prematurely after 1 year, then for the full years of the FD, 2% less interest is charged than the interest rate of the FD, and for the partial period of less than 1 year, the interest of a post office savings account is given.

Frequently Asked Questions (FAQs)

1. What is the minimum time to break a post office FD?

Answer: You can break your time deposit only after 6 months from the date of the deposit. It cannot be broken for 6 months. A 5-year FD cannot be broken before 4 years.

2. Can I take a loan against Post Office TD?

Answer: No. You cannot take a loan by pledging a Post Office Time Deposit (FD). However, a loan facility is available on Post Office NSC (National Savings Certificate).

3. Do these rules apply to FDs of all banks?

Answer: The rules of almost all banks are similar, but the penalty rate may vary. Most banks charge a penalty of 0.5% to 1%. The benefit of 80C is also withdrawn on breaking a 5-year tax saver bank FD.

4. What is the process of breaking an FD?

Answer: For this, you have to fill out your FD passbook and an application form and submit it at the post office where you have your account.

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.