Overdraft on Fixed Deposit: Meaning, Interest Rate & How It Works

An Overdraft on Fixed Deposit is a smart way to access quick funds without breaking your fixed deposit and losing interest. Instead of withdrawing your FD prematurely, banks allow you to borrow against it at a relatively low interest rate, while your deposit continues to earn returns. This facility is ideal for short-term cash needs, emergencies, or temporary cash flow gaps, offering flexible withdrawals, minimal documentation, and lower costs compared to personal loans or credit cards.

In this blog, we explain what overdraft on FD means, how it works, interest rates, bank-wise examples, benefits, risks, and when it makes sense to use it.

What Is an Overdraft on Fixed Deposit?

An overdraft on fixed deposit (FD overdraft) is a credit facility where a bank allows you to borrow money by keeping your fixed deposit as security. Instead of breaking the FD, the bank places a lien on it and gives you access to funds up to a pre-approved limit. The FD continues to earn interest, while you pay interest only on the amount you actually use.

Simply put:

• Your FD is marked as lien
• You get an overdraft account
• You can withdraw money up to a fixed limit
• Interest is charged only on the amount used

This facility is also referred to as loan against fixed deposit, but overdraft offers more flexibility in withdrawal and repayment.

How FD Overdraft Differs From a Regular Loan

An overdraft on FD is different from a regular loan in several ways:

• Security: FD overdraft is secured by your fixed deposit, while most personal loans are unsecured.
• Interest cost: FD overdraft interest rates are much lower because the bank already holds collateral.
• Repayment structure: There are no fixed EMIs in an overdraft. You repay at your convenience, whereas regular loans have mandatory monthly EMIs.
• Interest calculation: Interest is charged only on the amount utilized in an overdraft, not on the entire sanctioned limit, unlike regular loans.
• Approval process: FD overdrafts require minimal documentation and are often approved instantly for existing FD holders.

Relationship Between FD Value and Overdraft Limit

The overdraft limit is directly linked to the value of your fixed deposit. Most banks allow you to withdraw 75% to 90% of the FD amount as an overdraft.

For example:

• If your FD value is ₹5,00,000, the overdraft limit may range between ₹3,75,000 and ₹4,50,000.

The exact limit depends on factors such as:

• Bank’s internal policy
• FD tenure
• Type of FD (cumulative or non-cumulative)

Higher FD amounts and longer tenures generally result in higher overdraft limits.

How Does Overdraft on Fixed Deposit Work?

Step	Process Stage	What Happens
1	FD as Security	You open or already hold a fixed deposit with the bank. The FD acts as collateral for the overdraft facility.
2	FD Marked as Lien	The bank places a lien on the FD, restricting premature withdrawal until the overdraft dues are cleared.
3	Overdraft Account Linked	An overdraft account is created and linked to the FD, with a limit usually ranging from 75% to 90% of the FD value.
4	Withdrawal Flexibility	You can withdraw funds anytime up to the approved limit through net banking, cheque, or branch access.
5	Interest on Utilized Amount	Interest is charged only on the amount actually used, not on the entire overdraft limit.
6	Flexible Repayment	You can repay the overdraft partially or fully at any time without fixed EMIs or prepayment penalties.
7	Closure of Overdraft	Once the outstanding amount is repaid, the lien is removed and the fixed deposit becomes fully accessible again.

Overdraft on FD Interest Rate

The interest rate on overdraft against fixed deposit is one of its biggest advantages. Since the FD itself acts as security, banks offer this facility at a much lower rate compared to unsecured loans.

How Interest Rates Are Calculated

Banks calculate overdraft interest on a daily outstanding balance. This means:

• Interest is charged only on the amount you actually use
• The interest is calculated for the exact number of days the amount remains outstanding
• If you repay part of the overdraft, interest reduces accordingly

There are no fixed EMIs. You have the flexibility to repay anytime and minimize interest costs.

Typical Interest Rate Range (FD Rate + Margin)

Most banks price FD overdrafts as:

FD Interest Rate + 1% to 2% margin

For example:

• If your FD earns 6.5% interest, the overdraft rate may range between 7.5% and 8.5% per annum.

The exact margin depends on:

• Bank’s internal policy
• FD amount and tenure
• Customer relationship with the bank

Comparison With Personal Loan and Credit Card Interest

Compared to other borrowing options, overdraft on FD is significantly cheaper:

• Overdraft on FD: FD rate + 1% to 2% (usually 7%–9%)
• Personal Loan: Around 10%–24% per annum
• Credit Card Interest: Around 30%–40% per annum

This makes FD overdraft a cost-effective choice for short-term funding needs.

Overdraft Limit on Fixed Deposit

The overdraft limit determines how much money you can withdraw against your FD. Banks generally allow a high percentage of the FD value as overdraft.

Percentage of FD Value Allowed

Most banks allow an overdraft limit of:

75% to 90% of the fixed deposit value

For example:

• FD amount: ₹2,00,000
• Overdraft limit: ₹1,50,000 to ₹1,80,000

Factors Affecting Overdraft Limit

Bank Policy

Each bank sets its own rules for:

• Maximum overdraft percentage
• Risk buffer
• Eligible FD types

Public and private banks may differ slightly in limits offered.

FD Tenure

• Longer tenure FDs often get higher overdraft limits
• Very short-term FDs may have slightly lower limits

Type of FD (Cumulative / Non-Cumulative)

• Cumulative FD: Interest is reinvested, often preferred by banks for overdraft
• Non-cumulative FD: Interest is paid out periodically, may have slightly stricter limits

Bank-Wise Overdraft on FD Interest Rate Examples

Rates may vary based on FD tenure, customer profile, and bank policy.

SBI Overdraft Against FD

• FD interest rate + 1%
• Overdraft limit: Up to 90% of FD value

HDFC Bank Overdraft on FD

• FD interest rate + 1.5% to 2%
• Overdraft limit: Up to 90%

ICICI Bank FD Overdraft

• FD interest rate + 1%–2%
• Available via internet banking for select customers

Axis Bank Overdraft Against FD

• FD interest rate + 1.5%
• Flexible repayment, overdraft linked to savings/current account

Kotak Mahindra Bank FD Overdraft

• FD interest rate + 1%–2%
• Overdraft limit: Up to 85%–90%

These rates are significantly lower than:

• Personal loans (10%–24%)
• Credit card interest (30%–40% annually)

Eligibility Criteria for FD Overdraft

The eligibility requirements for an overdraft against fixed deposit are simple because the FD itself works as security. Most banks follow similar criteria with minor variations.

Who Can Apply

• Existing fixed deposit holders with the bank
• Individual account holders (single or joint, subject to bank rules)
• Resident Indians; NRIs may be eligible depending on bank policy
• Customers whose FD is not already pledged or under lien

Since the overdraft is fully secured, credit score and income proof are usually not required.

Minimum FD Amount Required

• The minimum FD amount typically starts from ₹25,000 to ₹50,000, depending on the bank
• Higher FD amounts improve approval chances and overdraft limits

Banks may set different minimum thresholds for online and branch-based applications.

Types of FDs Eligible for Overdraft

Most banks allow overdraft on:

• Cumulative Fixed Deposits
• Non-cumulative Fixed Deposits

However, the following are usually not eligible:

• Tax-saving FDs (5-year lock-in)
• FDs under government schemes with restrictions
• FDs already pledged as security

Documents Required for Overdraft on Fixed Deposit

Documentation for FD overdraft is minimal, especially for existing customers.

KYC Documents

• PAN card
• Aadhaar card or any other valid address proof
• Passport-size photograph (if required)

KYC is often already completed for existing FD holders.

FD Receipt or Account Details

• Fixed Deposit Receipt (FDR), if issued physically
• FD account number for digitally held deposits

These details help the bank mark the FD as lien.

Application Form / Online Request

• Overdraft request form (for branch application)
• Online application through internet banking or mobile app

Once submitted and approved, the overdraft account is activated quickly.

How to Apply for Overdraft on Fixed Deposit?

You can apply for an overdraft against fixed deposit either online or offline. The process is simple because the FD already exists with the bank.

Online Process (Internet Banking / Mobile App)

Most major banks allow FD overdraft requests through digital channels. The typical steps are:

1. Log in to your bank’s internet banking or mobile app
2. Go to the Loans / Overdraft / Loan Against FD section
3. Select the fixed deposit you want to pledge
4. Enter the required overdraft amount (within the eligible limit)
5. Accept the terms and conditions
6. Submit the request

Once approved, the overdraft account is created and linked to your FD. Funds become available almost instantly in many cases.

Offline Process (Branch Visit)

If online application is not available, you can apply through a bank branch.

1. Visit your bank branch where the FD is held
2. Request the overdraft against FD application form
3. Submit the form along with FD receipt or account details
4. Complete KYC verification, if required
5. Bank marks a lien on the FD and activates the overdraft facility

The offline process may take one to two working days depending on the bank.

Charges & Fees on Overdraft Against FD

One of the key benefits of overdraft on FD is its low cost compared to other borrowing options.

Processing Fees (If Any)

• Most banks charge zero or very nominal processing fees
• Some banks may waive fees for existing customers

Penal Charges

• There are usually no penal charges as long as the overdraft stays within the approved limit
• If the overdraft exceeds the sanctioned limit or remains unpaid for long, banks may recover dues by adjusting them against the FD

Interest Calculation Method

• Interest is calculated on a daily outstanding balance
• Charged only on the amount actually used
• No interest is charged on the unused overdraft limit

This flexible interest structure helps reduce borrowing costs when funds are needed for a short period.

FD overdraft is better if you need temporary funds.

Advantages of Overdraft on Fixed Deposit

An overdraft on fixed deposit offers several benefits, especially for short-term funding needs.

1- Lower Interest Rate

Since the overdraft is secured against your FD, banks charge a much lower interest rate compared to personal loans or credit cards. This makes it a cost-effective borrowing option.

2- No Income Proof Required

The fixed deposit itself acts as collateral, so income proof and extensive credit checks are usually not required. This makes approval quick and hassle-free for FD holders.

3- Interest on Utilized Amount Only

Interest is charged only on the amount you actually withdraw, not on the entire sanctioned limit. If you repay part of the amount early, your interest burden reduces immediately.

4- FD Continues to Earn Interest

Even after taking an overdraft, your FD continues to earn interest for the full tenure, helping you preserve your long-term savings while meeting short-term needs.

Disadvantages & Risks of FD Overdraft

While FD overdraft is useful, it also has certain limitations you should be aware of.

1- Risk of FD Being Adjusted if Dues Aren’t Paid

If the overdraft amount remains unpaid, the bank has the right to recover the outstanding balance by adjusting it against your FD, which may affect your savings.

2- Slightly Higher Interest Than FD Rate

The overdraft interest rate is higher than the FD interest rate (usually by 1%–2%), meaning there is still a borrowing cost involved.

3- Not Suitable for Long-Term Borrowing

FD overdraft is best for short-term or emergency cash needs. Using it for long periods can increase interest costs and reduce overall returns.

Tax Implications of FD Overdraft

Before opting for an overdraft against fixed deposit, it is important to understand its tax treatment.

Interest on FD Remains Taxable

The interest earned on your fixed deposit continues to be fully taxable as per your income tax slab, even if the FD is marked as lien for an overdraft.

Overdraft Interest Is Not Tax-Deductible

The interest you pay on the overdraft cannot be claimed as a tax deduction under the Income Tax Act, as it is considered a personal borrowing expense.

TDS Impact (If Applicable)

• Banks deduct TDS on FD interest if it exceeds the prescribed limit in a financial year.
• Taking an overdraft does not change TDS rules.
• You can submit Form 15G or 15H (if eligible) to avoid TDS deduction.

When Should You Choose Overdraft on FD?

An overdraft on FD is most suitable in specific situations where short-term liquidity is required.

Emergency Expenses

Ideal for sudden expenses such as medical emergencies, urgent repairs, or unexpected financial needs where quick access to funds is required.

Short-Term Cash Flow Needs

Useful for managing temporary cash flow gaps, business working capital needs, or timing mismatches between income and expenses.

Avoiding FD Premature Withdrawal

Best option when you want funds without breaking your FD and losing interest due to premature withdrawal penalties.

FAQs on Overdraft on Fixed Deposit

1. What is an overdraft on fixed deposit?

An overdraft on fixed deposit is a credit facility where a bank allows you to borrow money by keeping your FD as collateral. The FD continues to earn interest, and the bank charges interest only on the amount you use.

2. How much overdraft can I get on my fixed deposit?

Most banks allow an overdraft of 75% to 90% of the FD value, depending on bank policy, FD tenure, and type of deposit.

3. What is the interest rate on overdraft against FD?

The interest rate is usually 1% to 2% higher than your FD interest rate. Interest is calculated only on the amount withdrawn, not on the full sanctioned limit.

4. Is overdraft on FD better than breaking a fixed deposit?

Yes. An overdraft helps you avoid premature FD withdrawal penalties and allows your FD to continue earning interest, making it a better option for short-term fund needs.

5. Can I take overdraft on FD before maturity?

Yes, you can take an overdraft anytime during the FD tenure, as long as the FD is active and not already pledged.

6. Is income proof required for overdraft on FD?

No. Since the FD itself acts as security, banks generally do not require income proof or credit score checks.

7. How is interest calculated on FD overdraft?

Interest is calculated on a daily outstanding balance and charged only for the period during which the overdraft amount is used.

8. Can I repay overdraft on FD anytime?

Yes. There is no fixed EMI. You can repay the amount partially or fully at any time without prepayment penalties.

9. What happens if I don’t repay the overdraft amount?

If you fail to repay, the bank has the right to recover the outstanding amount by adjusting it against your FD.

10. Does overdraft on FD affect credit score?

Generally, FD overdrafts do not affect your credit score, unless there is a default that gets reported to credit bureaus.

11. Are there any processing fees for FD overdraft?

Most banks charge zero or very minimal processing fees for overdraft against FD.

12. Is FD interest still taxable if I take an overdraft?

Yes. The interest earned on FD remains fully taxable as per your income tax slab, even if the FD is under overdraft.

13. Can joint FD holders apply for overdraft?

Yes, but consent of all joint holders is usually required, depending on bank rules.

14. Is overdraft on FD suitable for long-term borrowing?

No. FD overdraft is best suited for short-term or emergency cash needs due to higher interest compared to FD returns.

15. Which banks offer overdraft on fixed deposit?

Most major banks in India, including SBI, HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank, offer overdraft facilities against FD.

Conclusion

An overdraft on fixed deposit is a practical and cost-effective way to meet short-term financial needs without disturbing your long-term savings. It allows you to access funds quickly, pay interest only on the amount used, and continue earning interest on your FD at the same time. Compared to breaking an FD or opting for high-interest borrowing options like personal loans or credit cards, an FD overdraft offers better flexibility and lower costs. However, it is best suited for temporary requirements and should be repaid promptly to avoid unnecessary interest. Before applying, always compare bank margins, overdraft limits, and terms to make the most of this facility.