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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.

RD interest rate  6.5% p.a. and 8.5% p.a. 
RD interest rate during premature withdrawal  The interest rate will drop by 1% -2% 

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  • In case an individual fails to repay the amount withdrawn before the RD matures, the bank/post office will deduct the said amount (with interest) before the maturity sum is paid.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.

Premature Withdrawal of Recurring Deposit FAQs

  1. Can a Recurring Deposit account be closed before the end of the maturity term?

    Yes, you can close a recurring deposit account before the end of the maturity tenure.

  2. Can I withdraw the entire amount as part of premature withdrawal?

    No, you can’t withdraw the entire amount. As per rules, the withdrawal amount is capped at a maximum of 50% of the deposit available in the account.

  3. Is it mandatory to keep the account operational for a particular number of years before premature withdrawal?

    Yes, the account needs to be operational for a period of at least a year i.e., 12 months

  4. Will the bank levy a penalty for premature withdrawal or closing the account?

    Yes, banks will levy a penalty for withdrawing money from the RD account or closing the account before maturity.

  5. Can I repay the withdrawn amount?

    Yes, you can repay the withdrawn amount before the account matures.

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