Recurring Deposit Withdrawal Before Maturity: Fees and Other Charges

Early withdrawal or pre-closure of RD may attract penalties. Additionally, you would lose out on interest earnings. That said, in emergency situations, where you're in need of urgent cash, RDs could be a saviour. That's why RDs are considered as one of the best financial vehicles to build emergency fund.

In this article, we'll guide you on the implications of withdrawing your RD before maturity. We've highlighted the potential charges involved in pre-closure of RD so that you can make an informed decision.

Understanding Recurring Deposits (RDs)

Let's quickly recap what a Recurring Deposit is. An RD is a financial product offered by banks that allows you to save a fixed amount of money on a regular basis for a predetermined period. The deposited amount earns interest over time, compounded and paid out on a quarterly basis. Once the maturity ends, the principal amount along with the accumulated interest is credited to your bank account. RD tenure ranges from 6 months to 10 years. You can break your RD before 6 months, but a penalty fee of 1% would be levied on the applicable rate.

Recurring Deposit Premature Withdrawal Penalties

If you’re planning to break your RD before maturity, consider the penalty charges involved. Generally, a penalty fee of 1% is levied on the applicable interest rate pertaining to the date of withdrawal. For example: let’s say you have opened a Recurring Deposit with Ujjivan SFB for 5 years. The interest rate for 5-year RD as on 8 November 2024 is 7.20%. For any emergency reason, you decide to withdraw your RD within 6 months. As on 8 November 2024, 6-month RD interest rate is 7%. So, you’ll be eligible for 7% - 1% = 6% interest rate. 

But what happens if your withdraw your RD after 6 months but before maturity date? Ujjivan doesn’t charge any premature RD withdrawal fee for withdrawals made after 6 months from the time of deposit. Let’s take the same example to understand this better. Let’s assume you have withdrawn the amount on the 250th day from the time of deposit. The applicable interest rate as on 8 November 2024 is 8.25%. So, you’ll be eligible for 8.25% interest.

But 8.25% interest is more than 7.20%. So, the returns would be more, no? Well, not really. RD interest is compounded quarterly. The interest keeps earning interest and over time provides higher returns. Let’s understand this with an example.

Let’s take two instances. In the first instance, you have invested ₹1,000 for 5 years at 7.2%. In the second instance, you have invested ₹1,000 for 1 year at 8.25%. Use an RD Calculator to check the returns. In the first instance, your maturity amount would have been approximately ₹72,300. In the second instance, you would have received only ₹12,548 upon maturity. The difference is huge because of the tenure of deposit and the compounding effect.

Why You Should Not Opt For Early Withdrawal of RD?

To withdraw your RD before maturity may seem like a convenient option in times of financial need, but there are several compelling reasons to avoid doing so. Here are the key considerations:

1. Penalties and Reduced Returns

   Most banks impose a penalty of 1% on the interest earned if you withdraw funds prematurely. This can significantly reduce your overall returns, as you'll lose the interest on the withdrawn amount. Apart from this, when you redeem your RD before maturity, the interest rate applied to your remaining balance may drop, further diminishing your potential earnings.

    

2. Impact on Financial Planning

   RDs are designed to encourage disciplined saving over time. Premature withdrawals can derail your savings plan and hinder your ability to reach financial goals, such as purchasing a home or funding education. By withdrawing early, you miss out on the benefits of compounding interest as well. 

    

3. Tax Implications

   The interest earned on RDs is taxable, which means that any premature withdrawal could lead to a higher tax burden if you're not prepared for it. This could further reduce your net returns from the investment