RD Premature Closure

Premature Closure Rules for Post Office RD 

The premature closure rules for the Post Office Recurring Deposit (RD) are as follows: 

1. Premature closure can be done with the post office three years after opening the RD account, as per the regulations of the Department of Posts. 
2. Suppose the RD account is closed before its maturity date, even by a single day. In that case, the interest rate applicable will be based on the post office savings account rate instead of the RD interest rate. 
3. The RD account cannot be closed prematurely if there are advance deposits made, and the closure is not permissible until the period for which the advance deposits have been paid is completed. 

Rules Pertaining to Premature Withdrawal of Recurring Deposits (RD)

Before we decide to prematurely close our RD, it is important to understand the rules pertaining to this move. While it is not recommended to close an RD before maturity, individuals who have no other choice should keep these points in mind.

1. As per the rules, one withdrawal is permitted before the maturity period. This withdrawal amount is capped at a maximum of 50% of the deposits in the account.
2. The withdrawal can be made only if the RD is operational for a minimum of 1 year, with 12 monthly deposits required in order to withdraw the sum.
3. The withdrawal amount needs to be in multiples of Rs.5 only.
4. In case of an individual withdrawing a sum, he/she will have to repay this, either through EMIs or via a lump sum deposit.
5. The bank/post office might charge a simple interest on the amount, which needs to be paid by the person withdrawing said sum.
6. In case an individual fails to repay the amount withdrawn before the RD matures, the bank/post office will deduct the said amount (with interest) before the maturity sum is paid.

Example - Let us see how premature withdrawal works with an example. Mr. Jacob, a teacher by profession decides to open a RD with a post office to ensure he has sufficient savings for the education of his child. He invests Rs.1,000 into the account every month. Two years after opening the account, he finds himself in dire need of money and decides to make a premature withdrawal. Given the fact that he has religiously deposited Rs.1,000 in the account every month for two years, he is entitled to one premature withdrawal.

The deposits made by him (minus the interest) amount to Rs.24,000, and he is entitled to withdraw a maximum of 50% of this amount. This ensures that he can withdraw Rs.12,000 to meet the emergency. Now, he can repay the amount either through monthly instalments or could pay a single lump sum. The post office decides to waive off the simple interest on this withdrawal, but there could be instances where the interest a RD earns is modified until the amount is repaid.

In case Mr. Jacob fails to repay the amount before the RD matures, the post office will make necessary adjustments, deducting this sum from the final maturity payout.

Post Office RD Interest Rates on Premature Closure

In order for banks or post offices to pay an interest on RDs they are required to invest the amount in other avenues, with the returns from these used to pay the interest. Any premature withdrawal means that there is a reduction in their corpus, which needs to be adjusted accordingly. This means that individuals who prematurely close their account or make a premature withdrawal will have to pay a certain interest.

Typically, interest on RDs can range between 6.5% p.a. and 8.5% p.a, depending on multiple factors. In the event of an individual making a premature withdrawal, this interest will drop by 1-2%, and will account for the interest to be paid by the individual. The interest will come back to normalcy once the amount is repaid.

Let us see this with the example of Mr. Jacob. Mr. Jacob's RD was earning an annual interest of 8.5%, but falls to 7% after he withdraw half the sum. The interest will go back to 8.5% once he repays the amount withdrawn.

Recurring Deposit Late Payment Charges

The EMI on a withdrawn sum should be paid on a particular date, failing which the bank/post office could levy a fine on an account holder. In case an individual fails to pay the EMI on the due date for a period exceeding three months, the account could be closed (at the discretion of the bank/post office). In case the bank/post office decides not to close the account, they can charge a certain fine on the amount.

This fine typically ranges between Rs.1.50 for every Rs.100 borrowed and Rs.2.50 for every Rs.100 borrowed. In addition, a service charge of Rs.10 might also be levied.

Let us understand how this works with Mr. Jacob's example. Jacob fails to pay the EMI for three consecutive months, post which the post office decides to levy a fine on him. The fine amount is Rs.1 for every Rs.100 borrowed, which amounts to Rs.120. He will be expected to pay this amount in addition to the EMI, plus a service charge of Rs.10.

Should You Make a Premature Withdrawal on Your RD?

The answer to this question depends on the situation you find yourself in. An RD should be broken/closed only if there is no other option available. In case you can find alternative means to arrange for money it is recommended you do so. If there is no other alternative but to make a premature withdrawal, it is suggested that you repay the amount on time, failing which the RD might not provide the benefits it was intended to.

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