Recurring Deposits (RD) are popular and secured means of short-term deposits. They are a systematic means of savings, especially for those with a lower income or those who have just started working. In fact, an RD account can be opened with an amount as low as Rs.10! If you ever wondered if you can break a Recurring Deposit and if there are any charges involved, we’ll clear that up for you. But before we do that, let’s see how a Recurring Deposit works and what sort of interest rates we’re looking at.
What’s a Recurring Deposit?
A Recurring Deposit is a bank savings account which gives you a fixed rate of interest, provided you do not access the funds for the fixed tenure. You can either open an RD account in a bank or with the post office. The minimum amount varies from one bank to another.
There are more benefits to having an RD account, such as using it to apply for a loan where you can get up to 80-90% of the deposit value. You can even claim a tax exemption on your RD account, although TDS is applicable on the interest you will receive (as per the new Income Tax rule applicable from June 1, 2015).
Additional reading: Recurring Deposits and TDS
Interest rates for RD
The interest rates offered on a Recurring Deposit account are very similar to those of a Fixed Deposit account. Most banks offer around 8 to 8.5% interest, but this varies from one bank to another. Always check the current RD interest rate offered by your preferred bank before opening an RD account.
Tenure of RD
You can generally open a Recurring Deposit account for a minimum period of 6 months and thereafter increase the tenure in multiples of 3, up to a maximum of 10 years. Again, the minimum tenure may vary from one bank to other. Also, in case of a post office RD, the minimum tenure is 3 months, though the maximum tenure remains the same.
Premature withdrawal of RD
In case you close the Recurring Deposit before its maturity, the interest rate will be paid at the rate applicable on the date of deposit, only for the period for which the deposit has been with the bank, with premature penalty charges. Banks will charge up to 1% or 2% as penalty for premature withdrawal.
Usually the minimum lock-in period of an RD account is 3 or 6 months for most banks. If a premature withdrawal is done before this period, you do not earn any interest and only the principal deposited amount is refunded. The banks will also deduct any incentive amount that may have been offered when opening the account.
Partial withdrawal of RD
Most banks do not allow partial withdrawal of RD accounts. Some banks provide an overdraft facility or will sanction a loan against your RD account instead of allowing a partial withdrawal. You can only do a partial withdrawal from your RD account, if you open it with a post office. In such cases, this can be done only after a year.
How do you break a Recurring Deposit prematurely?
In case you have to prematurely break or close your RD account, you need to follow these steps:
- Submit the duly filled-in pre-closure form to the bank.
- Submit any RD deposit receipts issued by the bank.
Some banks may require additional documents for verification purposes. The final amount will then be deposited to your bank account after calculating the penalty and compound interest amount.
An RD account is a good option to create an emergency fund or quickly build on savings. It’s advisable not to prematurely withdraw it, as the tenure is not too long and you can earn good interest! So, think twice before you decide to prematurely close your RD account.