Post Office TD Scheme- 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 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 5 year FD of post office?
You cannot break your 5-year FD in the first 4 years under any circumstances (no matter how much penalty is charged). 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 only get interest at the rate of 4% (the current rate of 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. It is very important for investors to know that the 5-year post office TD now comes with an almost impenetrable lock-in for the first 4 years.
The loss of interest is just one aspect. The real and biggest blow comes on the tax front. What the rule says is that you get tax exemption on a 5-year TD of the post office 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before the completion of 5 years, then the tax exemption you got on it in the year in which you invested will be withdrawn.
What does it mean?
The amount of tax that you saved by showing investment in FD will be added back to your income of the year in which you are breaking the FD, and you will have to pay tax on it as per your tax slab. Breaking a 5-year post office FD is a very costly affair. Not only does it cost you interest, but it also takes away the tax benefits. Therefore, always consider it as a last resort. If you need money, first look for other options. If a 2/3-year TD account is closed prematurely after 1 year, interest rate 2% lower than the FD interest rate is charged for the completed years of the FD and Post Office Savings Account interest is paid for partial period of less than 1 year.
