Is it the right time to break your old FD and reinvest?

As the central bank continues to increase repo rates to control rising inflation, there is good news for fixed deposit investors. As the interest rates on loans rise, banks are offering higher interest rates on savings schemes such as fixed deposits. Therefore, it may be the best time to reinvest the money in old FDs to earn better returns.

RBI has increased the repo rate by 225 basis points in the last seven months leading to an increase in interest rates. In May 2022, a fixed deposit maturing in more than one year to less than three years in the State Bank of India (SBI) would earn an interest rate of 5.10 percent to 5.20 percent. However, as of December 14, the interest rate jumped to 6.75 percent for the same tenure.

Small finance banks are also offering high rates on their fixed deposits and senior citizens can gain a max interest rate of up to earn 7.25-9.26 percent, as per an ET report.

In this situation, the question of whether to break the old FD and invest it again in the new FD arises. If you are considering this option, here are some things to check that could help you.

First, check the maturity date of your FD and if it is maturing in the next 6 months then breaking the FD and investing again in another FD will not be a beneficial option. This would incur an unnecessary penalty for breaking the FD early which the new returns may not be able to cover immediately as the interest on the FD is compounded on an annual basis.

You must check the penalty your bank imposes for breaking FDs before maturity. Most banks charge a 0.50-1 percent rate as a penalty. Banks pay the total amount after deducting the interest under the penalty which can cause a loss. In that case, the penalty should be avoided.

You should carefully evaluate the reinvestment options before breaking your existing FD. If the additional interest in the new options isn’t substantial enough to cover the charges, then re-investing be a huge burden.

You should also assess the tax applicable on the interest earned on the existing and the new FD. Suppose your FD comes in a 30 percent tax slab, then you will have to pay a substantial amount. However, senior citizens are exempted from this tax.

You must also note that the banks have not given the full benefit of the increase in the policy interest rates to the customers yet. Also, the RBI can increase rates even further in the future.