How to Avoid Penalties on Recurring Deposits and Safeguard Your Savings

Recurring Deposits (RDs) are great investment instruments. You invest a small amount of money every month via your linked Savings Account for a specific tenure an earn interest over it. For investments, no manual intervention is required. Your money gets auto-debited from your savings account on the due date. The interest rates are alo at par with Fixed Deposits. All seems so hunky-dory, right? 

Here's the catch - prematurely withdrawing your RD or missing RD payments due to insufficient balance can have repercussions. In this blog, we will explore effective strategies to avoid RD penalties and safeguard your savings.

Penalty for Non-Payment of RD Due

Your bank may charge a penalty if you fail to pay the RD due amount for a particular month. The penalty amount varies from one bank to another, so it is crucial to read the terms and conditions of your RD scheme to understand the penalty fee for non-payment.

Sometimes, if you consistently default on payments for several months, your RD account may be permanently deactivated or closed until you clear the outstanding amount. The duration before account closure varies between 3 to 5 months, depending on the bank.

Tips to Avoid Recurring Deposit Penalties 

To avoid RD penalties, here are some practical tips:

1. Set Up Standing Instructions 

   Consider setting up a standing instruction facility where the due amount will be automatically debited from your account and transferred to your RD account. This ensures timely payments and helps you avoid penalties.

    

2. Save Money in Advance 

   If you anticipate insufficient funds to pay the RD due every month, start saving beforehand. Allocate a portion of your income towards the RD instalment so that you have the necessary funds when the due date arrives.

    

3. Lower the RD Deposit Amount 

   If you consistently struggle to pay the full monthly due amount, consider reducing the deposit amount for your RD. Speak to your bank about lowering the instalment value to a more manageable level.

    

Recurring Deposit Premature Withdrawal Penalty

What happens when you foreclose your RD account before the due date? Most banks will charge a certain penalty fee on the applicable interest rate. For example, Ujjivan charges 1% premature withdrawal fee for withdrawals made before 6 months from the time of opening the RD account. But the interest rate is charged on the prevailing interest rate as applicable on the withdrawal date. Let's understand this with an example.

Let's say you have opened an RD account with Ujjivan SFB for a tenure of 1 year. The applicable interest rate as on 25 October 2024 for 1-year RD is 8.25%. Now, for some emergency, you decide to break your RD before 6 months. The applicable interest rate for a 6-month RD is 7% (data as on 25 October 2024). A premature RD withdrawal of 1% would be imposed on the applicable rate. So, at the time of withdrawal, you will be eligible for 7% - 1% = 6% interest rate.

Please note that Ujjivan does not levy any RD premature withdrawal fee for withdrawals made after 6 months from the time of opening the account.