What happens if we close RD before maturity?
At most Recurring Deposit providers, you will get the option to prematurely close an RD account and withdraw the amount from it. However, when you choose to close your RD account prematurely, you must pay 0.5% to 1% on your accumulated interest in your RD.
To answer your question about what if I close an RD before maturity, here is a consequence I would like to highlight. If you close your Recurring Deposit prematurely, your interest will be lowered compared to the agreed-upon interest.
For instance, if you open a 3-year RD at 7.5% p.a. but close it after just 2 years, the bank will not honour the original rate. Instead, the applicable 2-year RD rate, say 7.25%, will be applied to your deposit.
A few other consequences I am highlighting here:
- Most financial institutions will allow you to withdraw your RD partially. In such cases, you will be able to withdraw only 50% of your invested amount.
- Your RD provider will apply TDS if your total interest from breaking the RD exceeds the tax threshold.
Therefore, I would suggest not breaking an RD before its maturity. However, in case of a financial emergency or to benefit from a higher interest rate, you can do it by bearing the losses.