What Happens if You Redeem the RD before its Maturity Date?
5 min read | 5 months ago
RDs (recurring deposits) are a case study in evergreen popularity and relevance.
Despite the emergence of several other investment options over the years, they
have still been around and are preferred choices for investors across age
groups. Coming to an important question though- what happens if you redeem your RD before its maturity date? Let us find out more below, after getting a
glimpse into the basic concept behind this financial instrument.
What are RD Accounts?
RDs are term deposits that you will find at numerous banks and financial institutions. They are quite similar to FDs or fixed deposits, although you can invest fixed monthly amounts here for a specific duration instead of putting in a lump sum. You will get your principal amount back at maturity along with the interest that you earn. RDs are preferred by many, since they offer higher interest rates in comparison to savings accounts. However, there may be a scenario where you have to suddenly redeem your RD prior to its maturity date. This may be due to a financial emergency or the urge to invest in something else. So what happens in this case? Read on for more below.
Penalty Levied on Premature Withdrawal
If your RD is redeemed before maturity, you are also liable to pay a particular penalty amount. It is variable across banks and is usually calculated as a percentage of the earned interest. For example, if the penalty percentage is 1% and you had a total interest-earning of Rs. 10,000, then the penalty to be paid would be Rs. 100.
Calculation of Penalty Charges
The penalty for premature withdrawal is calculated based on the interest rate applicable to the RD, the period for which the RD was held, and the remaining period until maturity. The exact formula may vary from bank to bank, but it usually takes into account the above-mentioned factors along with the penalty rate that is specified by the bank.
Impact on the Interest Earned
If you redeem your RD before its maturity date, you will also lose out on the interest that you would have earned if you had held onto the deposit until maturity. The interest earned on an RD is usually higher than that earned on a savings account, and it can be a significant amount over a longer tenure. Therefore, it is important to consider the impact on the interest earned before you take the plunge and redeem the investment.
Factors to Consider Before Redeeming RD Before Maturity
Here are a few things that you should keep in mind before you decide to redeem your RD.
Personal Financial Goals
Your personal financial goals should be the foremost consideration when deciding whether to redeem your RD before its maturity date. If you need the money urgently for a medical emergency or to pay off a debt, then redeeming your RD may be the best option. However, if you have no urgent need for the money and can wait until maturity, it may be better to keep the RD intact.
Current Financial Situation
Your current financial situation should also be taken into account. If you have other sources of income or savings that can cover your immediate needs, then you may not need to redeem your RD before its maturity date. However, if you are facing financial difficulties and need the money urgently, then redeeming your RD may be the best option
Opportunity Cost
You should also consider the opportunity cost of redeeming your RD before its maturity date. If you have found a better investment opportunity that can earn you a higher rate of return than the RD, then it may be worth breaking the latter. However, if there are no other investment opportunities available, it may be better to keep it intact.
Conclusion
Thus, redeeming an RD before its maturity date can have several financial implications, including penalties and loss of interest earnings. However, in some cases, it may be necessary to redeem the RD if you need money urgently for any specific purpose. Now, there are often some other alternatives available, including taking a loan against the RD if it is available at your bank or taking a personal loan that you can repay conveniently in the short-term. This may help you avoid breaking the RD, which will anyway give you better returns than your bank savings account interest rate
FAQs
1. What happens if I redeem my RD before maturity?
If you redeem your RD before maturity, you may have to pay a penalty and receive a lower rate of interest than promised.
2. Can I redeem my RD partially before maturity?
Yes, you can redeem your RD partially before maturity, but the penalty and interest rate can vary depending on the bank or financial institution.
3. How is the penalty calculated if I redeem my RD before maturity?
The penalty for redeeming your RD before maturity is typically calculated as a percentage of the interest rate promised and can vary depending on the bank or financial institution.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
