How to Avoid Penalties on Recurring Deposits and Safeguard Your Savings

December 03, 2024

how-to-avoid-rd-penalty-charges

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.

 

TenureInterest RateWithdrawal DateFinal Interest Received
1 year8.25%4 months6%

 

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.

Final Thoughts

Avoid penalties on Recurring Deposits to enjoy maximum returns. Please contact your bank to know more about the penalty charges to avoid any unpleasant surprise.

 

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FAQs

1. What happens if I miss an RD payment?

If you miss RD payments for an extended period of time, the bank may close your RD account.

2. Can I avoid RD penalties by making multiple payments in a single month?

Generally, you cannot make multiple payments to a single RD account. However, some banks may offer flexible or special RDs that can permit multiple deposits. Speaking about penalty charges, you cannot avoid penalties if you prematurely withdraw RD, especially if your withdraw before 6 months from the time of deposit.

3. Can I change my RD installment amount after opening the account?

In most cases, it is not possible to change the RD instalment amount once the account is opened.

4. Can I withdraw money from my RD account before maturity?

Withdrawing money from an RD account before maturity may attract penalties or result in reduced interest earnings. It is recommended to complete the full tenure of your RD for maximum returns.

5. What should I do if I am unable to pay the RD due amount for consecutive months?

If you are unable to pay the RD due amount for consecutive months, it is important to contact your bank and discuss your situation. Without intimation, the bank may close your Recurring Deposit account.

6. Are there any tax benefits associated with recurring deposits?

Unlike Tax Saver Fixed Deposits (FDs), recurring deposits do not offer tax benefits under Section 80C of the Income Tax Act. The interest earned on RDs is taxable as per your income slab.

7. Can I make partial withdrawals from my RD account before maturity?

Partial withdrawals from an RD account before maturity are usually not allowed. To access the funds, you would need to close the account prematurely and may incur penalties or reduced interest earnings.

8. Is it better to opt for a fixed deposit (FD) instead of an RD to avoid penalties?

Both FDs and RDs have their own advantages and suitability depends on individual financial goals and preferences. FDs offer a lump sum investment with fixed tenure, while RDs allow monthly contributions towards savings.

9. Can I open multiple accounts to avoid RD penalties on missed payments?

While it is possible to open multiple RD accounts, it does not exempt you from penalties for missed payments. Each RD account operates independently, and penalties may be imposed if due amounts are not paid on time.

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