What will you do when you need funds urgently? Go for a loan? That might cost you a lot in interest. Most of the personal loans come with high interest rates and you won’t be able to pre-close the loan easily. That is why you should think about liquidating your investments before going for a loan. When you liquidate investments, it is important to look at the costs involved in such liquidation. This might be premature withdrawal charges and other penalties. If you think the costs of liquidating will be much higher than paying for the loan, then it is best to leave your investments as they are. If you do want to liquidate your assets, here are the details that you will need.
In case you want to liquidate your FD, banks could charge about 0.5% to 1% interest penalty for breaking your FD. Note that the interest for your deposit will be only for the tenure for which the deposit was with the bank and not the original tenure for which the deposit was booked. For example, if you invested in a deposit for one year at 8% and decide to break the deposit in 6 months. The interest rate applicable for 6 months will be paid and from this penalty will be deducted. Suppose the 6 months interest rate is 4% and the penalty is 0.5%, then you will get only 3.5% interest on your deposit when you break the deposit. Another thing you should remember is that tax will be applicable on this interest. So, breaking a deposit could mean higher charges. That’s why you could look for a loan against your deposit.
The first thing you need to do before you liquidate your FD is to check if you can get an overdraft on it. This is the cheapest type of loan. Most banks charge very low interest for deposit overdraft. The interest rate is usually 1% to 2% over and above the FD interest rate that the bank is giving you. For example, if you are getting 7% interest on your FD, you can get an overdraft loan for 9%. While you pay back the overdraft, your FD will continue earning interest. There are no loans that are available for such a low interest rate.
Public Provident Fund (PPF)
The Government last year said that you can close your PPF account under certain circumstances once you have held the PPF account for five years. These special circumstances will be higher education for you or your children and for medical expenses. However, from the seventh year onwards, you can make premature withdrawals from your PPF account. Check this post for more information on PPF withdrawal – A Quick Guide To PPF Withdrawals. There will be no tax implications even if you prematurely withdraw from your PPF account or close your PPF account.
You can withdraw your money from an open-ended fund at any time. There are two things you should note. One is the exit load and the other is the capital gains taxes. While short-term capital gains are taxed at 15% and long-term capital gains will be taxed at 10%. In case you want to sell a debt mutual fund, the long-term capital gains will apply only when you have held the fund for three or more years. The long-term capital gains will be taxed at 20% with indexation benefit. You can also consider a loan against your Mutual Fund units. Read this article for more information – Loan Against Securities Offers Credit On Tap, And It’s Cheap.
If you have held your shares for more than a year, long-term capital gains of 10% will apply. In case you have held them for less than a year, you have to pay short-term capital gains tax of 15%.
If you need cash urgently and have no investments to encash, you can go for a personal loan. Check for the lowest interest rate, processing charges and prepayment charges. Most banks don’t allow premature closure of personal loans. You can check if you have a pre-approved personal loan from your bank. Some personal loans have tax benefits. Read this post for more information – Personal Loans Have Two Tax Benefits, We Tell You How.