Here's the deal: You don't need to withdraw and return the current security deposit just to collect the additional $100.

Yes, you can deduct the 8 days rent from the security deposit.

The pet fee or deposit for the move in of 2 cats (you did charge one, I hope) should have just about covered the extra anyway.

Now, over a year and a half later, he sent a certified letter last week demanding the security deposit or legal action within 30 days.Please advise. 

If it's not a holiday, I would say, "No, the deposit remains in place until your lease ends."

You can not do a pet deposit unless your security deposit is less then 1 months rent.

Generally speaking, with SFR or small multis, I just rely on the lease/rent roll (and some form of proof of payment; i.e. bank statements, deposit receipts, tax returns, etc.). 

We did give 50k deposit up front which he says he will use towards finishing up.

We also received a $2400 security deposit.

Key points include:Security Deposits: In Indiana, there’s no legal cap on security deposits, but you must return the deposit (minus any valid deductions) within 45 days of the tenant vacating the property.Evictions: Follow the formal process carefully.