Should I break my FD to repay a loan?

Usually yes, if the loan costs more than the FD earns after tax and you keep an emergency fund. A 7% FD at the 30% slab earns about 4.8% after tax; a 12% loan costs far more, even after the FD's break penalty and the lender's fee.

What is the penalty for breaking an FD early?

Most banks cut the interest rate by 0.5 to 1 percentage point for the time the money was in, and some waive it after a minimum period. Check your bank's terms before you break it.

Should I keep an FD instead of prepaying for emergencies?

Keep enough for an emergency fund, a few months of expenses, in an FD or liquid fund. Money beyond that is better used to clear a loan that costs more than the FD earns.

Break your FD to repay a loan, or keep both?

Q: Is home loan prepayment better than an FD?

At the 30% slab, yes: a 7% FD keeps only 4.8% after tax, while prepaying an 8.5% home loan saves the full 8.5%. The FD would need about 12.3% to break even.

A 7% FD keeps 4.8% after 30% tax. Using ₹10 lakh of it to prepay an 8.5% home loan ends ₹10 lakh ahead in 15 years. See when to keep the FD.

8 Oct 20266 min read

You have money in an FD and a loan running at the same time. It's common, and usually costly: the FD earns interest you pay tax on, while the loan charges interest you don't get back.

Short answer: if the loan's rate is higher than what the FD earns after tax, using the FD to clear the loan wins, as long as you keep an emergency fund.

Compare the after-tax FD rate with the loan rate

FD interest is added to your income and taxed at your slab every year:

A 7% FD against a 8.5% home loan, by tax slab
Tax slab	FD after tax	FD rate needed to keep it	Prepaying ends ahead by
0%	7%	8.5%	₹4.9 L
20%	5.5%	10.7%	₹8.7 L
30%	4.8%	12.3%	₹10.2 L

Even at no tax, the FD would need 8.5% to beat prepaying an 8.5% home loan. Floating-rate home loans to individuals carry no prepayment charge.^[1]

Is home loan prepayment better than an FD?

Take ₹10 L in an FD at 7% and a ₹30 L home loan at 8.5% with 15 years left. Both paths pay the same EMI every month. Prepaying with the FD, the loan closes after 7.8 years, and from then the EMI goes into a new FD.

Figure 1 from the FD vs loan calculator

FD minus home loan: prepaying ends ₹10.2 L ahead

How to read it

1Keeping the EMI the same, the loan closes after 7.8 years instead of 15.
2By year 15, prepaying is ₹10.2 L ahead: the FD's 4.8% after tax can't keep up with the 8.5% the loan charges.

Open this scenario in the FD vs loan calculator

A personal or car loan: even clearer

With a ₹4 L personal loan at 12% and ₹5 L in an FD, breaking the FD clears the loan outright, even after a 0.5% FD penalty and a 2% foreclosure fee plus GST. You end ₹57.6K ahead by the loan's original end, and the FD would have to earn about 15.2% to make keeping it worthwhile.

Try it with your numbersFD or Clear the Loan?

Enter your FD, its rate, your slab and the loan. See which path ends richer, after penalties, fees and tax.

When to keep the FD

It's your emergency fund. Keep a few months of expenses liquid; only use what's beyond that. How many months to keep.
The loan earns a tax break. In the old regime, home-loan interest earns a deduction of up to ₹2 lakh, which narrows the gap.
The loan is very cheap, such as an education loan with an interest subsidy.

If you prepay a home loan, keep the EMI and cut the tenure to save the most.

What this doesn't mean

Keep the safety net. Money paid into a loan is hard to get back in a crisis.
Check the charges. FD penalties and fixed-rate loan foreclosure fees vary by bank.
Investing is a different question. For equity instead of an FD, see prepay or invest in a SIP.

FD interest taxed at your slab each year; loans repaid monthly; the EMI keeps going into an FD once the loan is gone. New regime, so no home-loan deduction. For illustration only, not financial advice.

Sources

[1]RBI directs lenders not to levy pre-payment charges on floating-rate loans to individuals (opens in a new tab)PTI, via The Week · 2 Jul 2025