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Premature Withdrawal of Recurring Deposit

A Recurring Deposit permits one to invest a small portion of their income into an instrument which provides decent returns without high risks. It is due to this fact that thousands of new RDs are opened every year across the country. While there are other products which offer similar returns, a Recurring Deposit provides flexibility in terms of use, with an option to prematurely withdraw a sum or even close the account in case of financial emergencies.

Rules Pertaining to Premature Withdrawal of Recurring Deposits

Before we decide to prematurely close our RD, it is important to understand the rules pertaining to this move. While it is not recommended to close an RD before maturity, individuals who have no other choice should keep these points in mind.

  • As per the rules, one withdrawal is permitted before the maturity period. This withdrawal amount is capped at a maximum of 50% of the deposits in the account.
  • The withdrawal can be made only if the RD is operational for a minimum of 1 year, with 12 monthly deposits required in order to withdraw the sum.
  • The withdrawal amount needs to be in multiples of Rs.5 only.
  • In case of an individual withdrawing a sum, he/she will have to repay this, either through EMIs or via a lump sum deposit.
  • The bank/post office might charge a simple interest on the amount, which needs to be paid by the person withdrawing said sum.
  • In case an individual fails to repay the amount withdrawn before the RD matures, the bank/post office will deduct the said amount (with interest) before the maturity sum is paid.

Example: Let us see how premature withdrawal works with an example. Mr. Jacob, a teacher by profession decides to open a RD with a post office to ensure he has sufficient savings for the education of his child. He invests Rs.1,000 into the account every month. Two years after opening the account, he finds himself in dire need of money and decides to make a premature withdrawal. Given the fact that he has religiously deposited Rs.1,000 in the account every month for two years, he is entitled to one premature withdrawal.

The deposits made by him (minus the interest) amount to Rs.24,000, and he is entitled to withdraw a maximum of 50% of this amount. This ensures that he can withdraw Rs.12,000 to meet the emergency. Now, he can repay the amount either through monthly instalments or could pay a single lump sum. The post office decides to waive off the simple interest on this withdrawal, but there could be instances where the interest a RD earns is modified until the amount is repaid.

In case Mr. Jacob fails to repay the amount before the RD matures, the post office will make necessary adjustments, deducting this sum from the final maturity payout.

Interest Rate in Early Withdrawal/Closure

In order for banks or post offices to pay an interest on RDs they are required to invest the amount in other avenues, with the returns from these used to pay the interest. Any premature withdrawal means that there is a reduction in their corpus, which needs to be adjusted accordingly. This means that individuals who prematurely close their account or make a premature withdrawal will have to pay a certain interest.

Typically, interest on RDs can range between 6.5% p.a. and 8.5% p.a., depending on multiple factors. In the event of an individual making a premature withdrawal, this interest will drop by 1-2%, and will account for the interest to be paid by the individual. The interest will come back to normalcy once the amount is repaid.

Let us see this with the example of Mr. Jacob. Mr. Jacob’s RD was earning an annual interest of 8.5%, but falls to 7% after he withdraws half the sum. The interest will go back to 8.5% once he repays the amount withdrawn.

RD Late Payment Charges

The EMI on a withdrawn sum should be paid on a particular date, failing which the bank/post office could levy a fine on an account holder. In case an individual fails to pay the EMI on the due date for a period exceeding three months, the account could be closed (at the discretion of the bank/post office). In case the bank/post office decides not to close the account, they can charge a certain fine on the amount.

This fine typically ranges between Rs.1.50 for every Rs.100 borrowed and Rs.2.50 for every Rs.100 borrowed. In addition, a service charge of Rs.10 might also be levied.

Let us understand how this works with Mr. Jacob’s example. Jacob fails to pay the EMI for three consecutive months, post which the post office decides to levy a fine on him. The fine amount is Rs.1 for every Rs.100 borrowed, which amounts to Rs.120. He will be expected to pay this amount in addition to the EMI, plus a service charge of Rs.10.

Should You Make a Premature Withdrawal on Your RD?

The answer to this question depends on the situation you find yourself in. An RD should be broken/closed only if there is no other option available. In case you can find alternative means to arrange for money it is recommended you do so. If there is no other alternative but to make a premature withdrawal, it is suggested that you repay the amount on time, failing which the RD might not provide the benefits it was intended to.

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Recurring Deposit Reviews

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  • HDFC Bank Recurring Deposit
    "Its Better"
    0.5 4.0/5 "Great!"
    Earlier I had recurring deposit with HDFC, they gave me around 6.75% per annum, I have opened the RD through online I can track information through netbanking, at last I didn't get the benefits. Everything and the safe and secured premature charges was not there.
    Was this review helpful? 5
    , bangalore
    Reviewed on Jan 04, 2019
  • Bank of Baroda
    Bank of Baroda Recurring Deposit
    "Good investment for future"
    0.5 5.0/5 "Blown Away!"
    Percentage of interest in Bank of Baroda around 7% for one year, generally I deposit the amount around Rs.4000, I opened for one year. They have good online options, I can track the RD details. They take some charge for the premature of recurring deposit.
    Was this review helpful? 4
    , jaipur
    Reviewed on Dec 20, 2018
  • ICICI Bank Recurring Deposit
    "Short term investment"
    0.5 5.0/5 "Blown Away!"
    Initially ICICI gave me good interest rate for my recurring deposit, but for premature interest rate is not upto the mark and they not giving proper information. I am paying Rs. 2000 on monthly basis, they offered me the interest rate around 7.25% its good for short time investment.
    Was this review helpful? 6
    , chennai
    Reviewed on Jun 30, 2017
  • Indian Bank Recurring Deposit
    "Average "
    0.5 3.0/5 "Satisfactory"
    With the Indian bank , I do have the recurring deposit and the account got opened on immediate basis. Premature withdraw charges are applicable with them for the deposit. Online banking services are good one with the Indian bank.
    Was this review helpful? 6
    , chennai
    Reviewed on Jun 22, 2017
  • HDFC Bank Recurring Deposit
    "Better "
    0.5 4.0/5 "Great!"
    I had closed the recurring deposit account with the HDFC bank and the services offered by them was exemplary. Rate of interest is a nominal one with them and the lock in period was around one year of time. There were no penalty charges absolutely for the premature withdrawal. On top of all that, Customer service provided by HDFC Bank is really fantastic.
    Was this review helpful? 10
    , pune
    Reviewed on May 18, 2017
  • ICICI Bank Recurring Deposit
    "Can be better"
    0.5 5.0/5 "Blown Away!"
    I had opted in and opted out through online for ICICI RD . Basically liquidation happens within 24 hours of time. it all depends on the time when the executive picks the request they break it followed by which the amount gets transferred to my account instantly no charges for the same. Of course, the premature ( withdrawal charges) are applicable which is 1% on the outstanding principle amount.
    Was this review helpful? 2
    , hyderabad
    Reviewed on Jan 02, 2017
  • Union Bank of India Recurring Deposit
    0.5 5.0/5 "Blown Away!"
    I am having the recurring deposit with the Union bank of india and for every three months I used to close the account depends up on my usage. For the premature there are no charges with any deposit account and am having it from the last one year of time.
    Was this review helpful? 11
    , nellore
    Reviewed on Nov 24, 2015
  • Axis Bank Recurring Deposit
    0.5 5.0/5 "Blown Away!"
    The recurring deposit with Axis bank is really good.Locking period is 2 month.Normally I am paying around 7000Rs as monthly and the rate of interest as 8.5%. There is no problem with them at any cost because they will not charge anything for premature closure.
    Was this review helpful? 5
    , mundra
    Reviewed on Jun 03, 2015
  • Lakshmi Vilas Bank Recurring Deposit
    "Lakshmi Vilas Bank is a cheat - Unfairly treated"
    0.5 0.5/5 "Unacceptable"
    I had 4 RD accounts with LVB. Money gets trfd from my SB a/c each month. For the last instalment, the bank had delayed the debit and did not inform me. On the maturity date, they terminated my RD and called it a premature closure and deducted a hefty penalty. My entire RD for over 2 years was wasted due to this. On the top of this, they are refusing to accept their fault and make good the loss of interest. Never ever again bank with LVB.
    Was this review helpful? 13
    , bangalore
    Reviewed on Feb 10, 2015
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