If you invest in a tax saving FD and break it before 5 years, you have to suffer double loss. Firstly, you have to pay a penalty for a pre-mature FD. And the second loss is in the matter of tax.

Usually, when you make an FD, you do not get income tax benefit, but you get this benefit in a 5-year FD. This is why it is also called Tax Saving FD. Under Section 80C of the Income Tax Act, tax exemption can be availed on investment up to Rs 1.5 lakh. You will get the option of 5-year FD in post offices and all banks.

But if you break a tax saving FD before 5 years after investing in it, then you have to bear double loss. Firstly, you have to pay a penalty for pre-mature FD. This penalty can be different in banks and post offices. The second loss has to be borne in the case of income tax. Know how here.

How much penalty is charged?

According to the information given on the post office website, if you break the FD after six months and before 1 year, then you do not get the interest of FD, but the interest of savings account is given on it. If 4 percent interest is given on savings account in post office, then you will also be given the same interest. If you break it after completion of 1 year, then for the full years of FD, 2% less interest is charged than the FD interest rate and for the partial period of less than 1 year, the interest of Post Office Savings Account is given.

Understand by an example

Suppose you break a 5 year FD after 3 years and 7 months, then you will get interest at the rate of 5.5% for 3 years because 7.5% interest is being given on 5 year FD and after reducing it by 2%, it will be 5.5%. On the other hand, the interest of savings account i.e. 4% interest will be given for the remaining 7 months. In case of penalty, the same rule is equally applicable on 2, 3 and 5 year FDs.

This loss will happen in terms of tax

If you break a 5-year FD before maturity, then the tax claim under section 80C will be rejected. In such a situation, that amount will be added to your current income and after this, income tax will be taken from you according to the tax slab.

Understand how with an example

Suppose you invested in Tax Saving FD in the year 2024 and in 2024 you have taken advantage of tax exemption of Rs 1.5 lakh on annual income under 80C. But in the year 2025, you broke the FD due to some need, then in such a situation, the 1.5 lakh rupees that you have saved in income tax in the last financial year will be added to your income of 2025 (financial year 2025-26). After this, income tax will be taken from you according to the tax slab.