Premature Withdrawal of a Recurring Deposit: Pros and Cons

Recurring deposits is one of the most secure and most popular savings schemes. The common citizens of India prefer saving their hard earned money for unforeseen future circumstances. And if they get lucrative interest rates on the investment, nothing is better than that. How much interest rate do banks offer?

In a recurring deposit, you need to submit principal amount at regular intervals, generally every month. The interest rate is compounded quarterly. When you withdraw the amount after maturity period, you will get the total amount, including principal and the interest. I found that the site has detailed information about the recurring deposit calculations.

The minimum lock-in period for recurring deposits is 6 months and the maximum is 10 years. Generally, premature withdrawal is not allowed in recurring deposits. But, there is a provision for premature withdrawals. There are certain pros and cons associated with it. Let us discuss them in detail here.

Pros of Premature Withdrawal

  • If you are in need of money, you can opt for premature withdrawals. The benefit of premature withdrawal is that you will get the entire amount, along with the interest. You can meet your requirement by breaking your recurring deposit.
  • Unlike a savings account, you get impressive interest rates on recurring deposits. This means you can accrue lucrative interest on the principal amount. Since the interest is calculated quarterly, you can withdraw the amount at any time and you will be liable to get the interest
  • If you want to withdraw a partial amount of your investment, you can do so if you have a recurring deposit account in a post office. But, the only condition is that your account should be at least 1 year old. Moreover, you can consider this withdrawal as a loan that you can repay back as a lump sum.

Cons of Premature Withdrawal

  • As mentioned earlier, premature withdrawals are not allowed in recurring deposit schemes. But, if you plan to do so, the interest rate will be deducted by 1-2%. This means you will the invested amount but the interest will be deducted. This is the penalty charge. For example, the bank offered 8% interest rate on the recurring deposit scheme for a certain time. If you withdraw the amount before maturity period, the interest rate will be 6-7% at the time of withdrawal.
  • Apart from a penalty, incentives offered by the banks are also canceled. These incentives differ from bank to bank. As premature withdrawal is against the rule, the incentives will be canceled as per the rules and regulations.
  • The interest rate is calculated on a quarterly basis. Hence, if you opt for premature withdrawal before 3 months of completion of the RD account, you will receive no interest at all. You will be entitled to receive the principal amount only.

Recurring deposits have pros and cons associated with it. One of the lucrative features is that the account owners can avail loan or overdraft facility against the deposit amount. RD will serve as the collateral for your loan. 80-90% of the deposit amount can be availed as a loan by the client.

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