While there are several advantages of opening a fixed or term deposit online, one drawback that it has is that you can withdraw the fixed deposit online instantly with a click of a mouse.
One would have been reluctant to be visit the bank with a physical certificate and then withdraw the proceeds before maturity.
Faster and quicker online mechanism also means the temptation to withdraw the deposit before maturity is higher.
Why you lose if you break your fixed deposit early?
Let's cite this with an example. Say, you invested in a one year deposit in Jan 2015 at an interest rate of 9 per cent.
Now, if in the month of July you decide that there was an emergency and you need to withdraw the amount, you would get interest that was applicable for 7 months at the time of opening the deposit.
This means that you would not get 9 per cent, but, the interest of probably 7 per cent, which is prevailing on a 7 month deposit.
Apart from this there would be a penalty, which is one per cent at most of the banks. Therefore, you might just end-up getting 6 per cent pre-tax and your post tax returns would be even lower.
Today, there are many banks that do not levy a penalty on pre-mature withdrawal of your fixed deposit. For example, until recently IDBI Bank Freedom Deposit Advantage did not charge any penalty on premature withdrawal of fixed deposits (need to check now). Private sector bank, Yes Bank also does not have a penalty on premature withdrawal of fixed deposits. It's hence better to look at such banks before investing.
It's advisable that you go in for a fixed deposit of a shorter period, in case you feel there is an emergency that is likely to arise.
Avoid breaking your fixed deposit under any circumstances. Some banks offer an interest rate of as much as 6 per cent on a savings account, making it more attractive to keep money in a savings account rather than open an FD.
It's best to consider such banks as the interest on savings account is tax free upto Rs 10,000 per year.