Points to know before Premature Closure of Recurring Deposit (RD)
People primarily save in two ways: they either invest a lump sum in one go or set aside part of their earnings periodically. You can choose one of these options depending on what suits your needs and the amount of surplus money you have. Depending on your risk tolerance level, you can choose to invest in market-related or fixed-income securities.
If you seek fixed returns from your investments, you can invest in fixed deposits (FD) or recurring deposits (RD). Salaried employees or people with predictable monthly earnings can decide to do the latter and save a fixed part of their monthly income. In this case, you transfer the amount every month into a recurring deposit account.
Recurring deposits are among the most popular tools for investing small sums periodically in a planned manner. Their popularity arises from the flexibility to choose the amount and the periodicity of the deposit. Also, it enables you to create a corpus from scratch.
Although it is advisable to hold it until maturity, the flexibility to prematurely withdraw from the RD lends it the character of an emergency fund. Continue reading to learn more about the premature closure of RD.
What is a Recurring Deposit?
A recurring deposit consists of a bank or post office deposit account in which you make monthly contributions. Being a fixed-income instrument, it offers a fixed return in the form of interest payments. These can be obtained as a cumulative amount at maturity or as regular payments based on your choice. It can be opened by any individual above the age of 18. You can also open an RD on behalf of a minor.
In the case of bank RDs, you can choose a tenure of 6 months and up to 10 years. The maturity period of the post office RD is 5 years which can be extended further. . You also choose the monthly deposit amount of your choice. You will earn a fixed rate of interest on the recurring deposit. This interest rate depends on the tenure of the RD you select and the deposit amount. Senior citizens, however, earn higher interest rates than others.
For convenience, set up a standing instruction to debit the monthly contribution from your savings to the recurring deposit account each month.
Since the return is fixed, you can know the exact amount you will receive at the end of the investment period. A recurring deposit is especially suitable for saving for specific expenditures, such as planning to purchase a car or saving for a vacation.
Now let’s understand the rules around premature closure and withdrawal of a recurring deposit.
Premature Closure Rules of Post Office Recurring Deposit
Below are the rules for premature closure of the post office recurring deposit:
- The Department of Posts allows you to prematurely close your RD with the post office three years after opening the account.
- If the account is closed even one day before maturity, the interest rate on post office savings accounts will be applicable on the RD instead of the RD interest rate
- In case deposits have been made in advance, the RD cannot be closed until the period up to which the deposit is paid is over
Rules Pertaining to Premature Withdrawal of Recurring Deposits
Before choosing to withdraw prematurely from a recurring deposit, the following rules must be taken into account:
- Generally, most banks allow only one premature withdrawal before maturity
- The withdrawal amount is limited to 50% of the total amount invested in the account till the date of withdrawal
- The amount can be withdrawn only in multiples of ₹5.
- A lump sum or a series of equal payments must be made to repay the withdrawn funds
- The bank may or may not charge interest on the amount withdrawn prematurely.
- If you do not repay the amount, the bank will deduct the amount, along with interest on it, from the maturity amount.
Let’s say you start an RD with a monthly deposit of ₹ 2,000. After two years, you urgently need some money. The total deposited amount in such a case would be 12*2,000*2 = ₹ 48,000. So, you are eligible to prematurely withdraw 50% of this amount, which is ₹ 24,000.
Interest Rate in Early Withdrawal/Closure
Premature withdrawal affects you in two ways:
- You do not earn any interest on the withdrawn amount from the time you take it out till you pay it back to the account.
- The interest rate being paid to you on the remaining balance in your account drops by 1-2%.
Penalties or charges for Premature Closure of RD
You must repay the withdrawn amount within the stipulated time. If you fail to pay the same by the due date for a period of more than three months, you can be charged a penalty. The penalty is usually 1.5 to 2.5% of the total borrowed amount.
In the above example, if you fail to repay in time, at a penalty of 1.5%, you will be charged Rs. 360.
The best case scenario would be to avoid premature closure of RD and try to explore alternative sources for funds. However, in case the situation demands, you can use your recurring deposit as an emergency fund and withdraw from it. Knowing about the penalties and charges for premature withdrawal and closure will help minimise your losses. Always repay the prematurely withdrawn amount to realise the benefits of the RD in full.
Frequently Asked Questions
Can I prematurely close my RD account?
Yes. Premature closure of RD is an option, but you might be charged a penalty for the same.
What is the difference between a recurring deposit and a SIP?
A recurring deposit earns interest, while a SIP earns returns from a bucket of equity or debt instruments. The latter is the riskier of the two as it is subject to market risk, but the return potential is higher. On the other hand, a recurring deposit gives assured returns and secures the deposited capital.
Can I withdraw the entire amount as a premature withdrawal?
No. You can prematurely withdraw at most 50% of the deposited amount.
On what factors does the interest rate offered on an RD depend?
The interest rate on RDs depends on:
Age of the applicant: Senior citizens are paid higher interest rates on an RD than others.
Bank: The interest rates depend on the bank, with small finance banks offering higher interest.
Tenure of the RD: The longer the tenure, the higher the interest rate
Can I change the amount to be deposited periodically into the RD?
No. Once an RD is started, you cannot change the amount or tenure.
Is RD better than FD?
An FD is better if you want to invest in a lump sum. An RD is better if you want to save periodically from your income stream.