Business and Trade

What happens when you think about breaking your Recurring Deposit scheme?

The recurring deposits or RD  are the most popular deposit schemes which are very secure short term deposits. The RDs are the most systematic and structured means of savings for the individuals who have a lower income level or the newly employed individuals who earn less. An individual can open an RD account even with a very low amount of money. There are many queries regarding the recurring deposit from every individual. The most important and frequently asked question is that if an RD can be broken and are there any charges applicable for it. It is very important to understand how, when, and what all happens in a recurring deposit.

What is an RD or Recurring Deposit?

An RD or a recurring deposit is a savings account in the bank that will give a definite and fixed rate of interest when the funds are not touched during the fixed tenure. The recurring deposit account can also be opened by the individual with the post office or in a bank. The amount for the minimum deposit varies from one lender to another.  There are many more added benefits and features for having an RD account. The applicant will get around 80-90% of the value in RD deposit. RD accounts are tax exempted. One can claim the tax exempted benefits in a recurring deposit.

Interest rates in an RD or recurring deposit

The interest rates that are offered for the recurring deposit account are the same as rates offered in a fixed deposit account. Most of the banks will offer an attractive rate of interests, but it varies from one lender to another. It is always advisable to check for the RD interest rate that is offered by the financial institution before opening an account. It is very important to analyse the financial market before opting for the recurring deposit.

Tenure period in an RD

One can always open a recurring deposit account for a tenure period with a minimum of 6 years and gradually increase it in multiplications of 3 to a maximum of 10 years. This calculation may vary from one financial institution to another. When it is a post office RD, the tenure varies with a minimum of 3 months, and the maximum remains the same with no change.

Premature withdrawal in recurring deposit-

When the applicant is closing the recurring deposit account before the period of maturity, the interest rate will be paid as per the rate previously applicable on the deposit date, only for the period for which deposit is made with the bank. There may be some penalty charges involved.  Banks will usually charge around 1% to 2% for the premature withdrawal made. The minimum period for lock-in for an RD account is 3 to 6 months for the banks in the market. When a premature withdrawal is made before the period, one will not earn any interest, and the deposited principal amount will be refunded back. Financial institutions will deduct any amount for an incentive that has been offered with the opening of the RD account.

Partial withdrawal of a recurring deposit-

Most of the financial lenders will not allow the partial withdrawal of the recurring deposit accounts. In some cases, the banks will give overdraft facility or will approve the sanction of loan against the RD account without approving the premature withdrawal of RD. One can make a partial withdrawal from the RD account if the account is opened with a post office. In those cases, it happens after one year.

How to break open a Recurring Deposit prematurely?

There are a few steps to follow while breaking open an RD account. The steps needed to be followed are,

  • One must submit all the duly filled pre-closure form to the financial institution with observation.
  • One must submit any recurring deposit receipts that are issued by the bank.

In some of the banks, they may require any additional documents for the process of verification.  The final amount will be deposited to the account of the individual after calculation of penalty as well as compound interest amount.

Features of Recurring Deposit-

The recurring deposit will help the individual earn a fixed amount of interests at every frequent interval of time until the maturity of an investment or pre-determined end of the term. The total amount that is disbursed to the investor after the maturity period is completed. In the above calculation, invested capital amount and the accumulated interest are calculated.

There are a lot of features involved with the recurring deposit. Let us discuss the features in detail. They are,

  • Minimum Investment– The minimum investment amount made varies from one bank to another. One can open an RD account with even a trivial amount of money, and this will benefit every individual with having accounts easily.
  • Term deposit- The minimum tenure deposit for the recurring deposit starts from six months. The tenure can be a suitable period of deposit with a maximum tenure which can be expanded to around ten years.
  • Interest rate- The rate of interest offered on an RD is always higher than the rate of interest earned through a savings account. The interest rates for an RD will be similar to that of a fixed deposit. The periodic investment, instead of a lump sum amount, will make it very suitable for every individual who aims to have a corpus with their monthly savings.
  • Withdrawal on maturity- The withdrawal made from this account will be allowed only after the attainment of maturity. When one chooses to withdraw the amount before the end of the maturity period, it will attract a premature penalty.
  • Loan against a deposit- The individual has an option for availing a loan against the RD account. The banks will allow about 95% of the deposit amount as a loan against the deposit used for collateral.
  • Instructions for monthly deposit- When the individual feels convenient to deposit the amount of money on a periodical basis, the banks will facilitate the payments as deductions from linked accounts which can be either savings or current account as per given instructions.

An RD or a recurring deposit account is always considered as a good option to make an emergency fund for building quick savings. It is always advisable not to make premature withdrawals as the tenure will not be very long, and one can earn a rewarding interest. It is always wise to think twice and make a smart move while planning to close your RD account prematurely. Hence, it is advisable to invest in an RD and make the most financial benefits out of them.

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