Premature closure of a Recurring Deposit (RD) typically incurs a penalty, which is usually a reduction in the interest rate earned on the deposit. This means that if you close your RD account before its original maturity date, you will likely receive a lower interest rate than what was initially agreed upon for the full tenure.
Understanding Premature Closure Penalties
Financial institutions levy these penalties to compensate for the administrative costs and potential loss of expected interest income from the prematurely withdrawn funds. The exact penalty can vary between banks and is often determined by the original tenure of the deposit and the period for which the money was held.
A common penalty structure observed across financial institutions is based on the original tenure of the deposit:
| Original Tenure of Deposit | Penal Rates* |
|---|---|
| Less than 1 year | 0.50% |
| 1 year and above, but less than 5 years | 1.00% |
| 5 years and above | 1.00% |
*These rates are indicative and represent a typical reduction in the contracted interest rate. Actual rates are subject to change by individual banks.
For example, if your RD was opened for a tenure of 3 years and you decide to close it after 1.5 years, the applicable penalty might be a 1.00% reduction from the original interest rate agreed upon.
Key Aspects of RD Premature Closure
When considering premature closure of your RD, keep the following practical insights in mind:
- Interest Rate Reduction: The primary penalty is a reduction in the interest rate applied to the period your funds were held. This means you will earn less interest than anticipated.
- Minimum Hold Period: Some banks may not pay any interest if the RD is closed within a very short period from the opening date (e.g., within 7 or 15 days).
- No Penalty on Demise: Generally, banks do not levy any penalty for premature closure in the event of the unfortunate demise of the account holder. The full accrued interest up to the date of closure is usually paid to the nominee or legal heir.
- Partial Withdrawals: Most RDs do not allow partial withdrawals. Premature closure means closing the entire account and withdrawing the full accumulated amount along with the reduced interest.
- Impact on Financial Goals: Prematurely closing an RD can disrupt your savings goals, as the intended corpus will not be fully realized, and the earned interest will be lower.
Before proceeding with a premature closure, it's advisable to check with your specific bank for their current and exact penalty terms and conditions, as policies can vary.
