Whether it is to satisfy your short term goals or to save up for a large expense, recurring deposits (RDs) are one of the best investment options available to you. All that you need to do is contribute a predetermined sum of money at regular intervals for a specified tenure.
At the end of the tenure, you will receive your principal investment amount along with the interest accrued on it. To get to know just how much of a return you’re likely to get on an RD, you can simply use a recurring deposit calculator.
That said, if you’re not careful with an RD, you may end up incurring penalties, which can derail your investment journey. In this article, we’re going to be taking a look at why RD penalty is levied and how financial institutions go about calculating it. Let’s begin.
Firstly, before we take a look at how the RD penalty is calculated, let’s try to understand when the penalty is levied in the first place.
Now, since an RD requires you to make deposits regularly throughout the entire tenure, missing even one deposit can lead to a penalty being imposed on you. Also, missing three or more RD deposits consecutively can even lead to an automatic closure of your RD account as well.
As you know by now, the principal and interest accrued in an RD is only payable to you at the end of the tenure. However, most banks and financial institutions allow you to prematurely withdraw the amount in your RD account subject to a penalty.
Just like how you can determine the amount of interest that you’re likely to get from a recurring deposit using an RD interest calculator, you can also calculate the RD penalty as well.
However, there are no dedicated online calculators for the same. Instead, you’re required to do it manually. One of the reasons for this is the fact that the quantum of RD penalty tends to vary from one financial institution to the other.
That said, let’s now take a look at how the penalty is calculated in both the above cases - on missing an RD payment and on premature withdrawal of an RD.
Let’s say that you’ve opened an RD account, where you’re required to pay Rs. 5,000 each month for a tenure of 5 years at an interest rate of 7% per annum. The penalty for missing a deposit would be Rs. 1.50 for every Rs. 100 per month. Assume that you’ve missed deposits for two consecutive months. In such a case, here’s what the penalty would be.
Penalty = Rs. 1.5 * (Rs. 5,000 ÷ Rs. 100) x 2 months = Rs. 150
You will have to pay this penalty, along with Rs. 10,000, which is the monthly deposit that you missed for 2 months.
Now, let’s take the same example as above, instead of holding onto your RD till the end of your tenure, you decide to prematurely withdraw the RD after just one year.
Say that you’ve accrued an interest of about Rs. 2,300 till now. Upon premature withdrawal, the financial institution will levy a penalty of about 1% to 2% on the accrued interest portion. In our case, let’s keep it at 1%.
So, the amount of penalty that you will have to bear would be about Rs. 23.
Although the RD penalties as mentioned above may seem quite trivial, it is advisable to ensure that you make deposits regularly. This way, you can satisfy your financial goals quickly and more efficiently. Before you open an RD, remember to make use of a recurring deposit interest calculator to determine the amount of interest that you’re likely to earn.
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