Overdraft Facility: The Flexible Loan You May Already Have

You have Rs. 10 lakh in a bank FD at 7%. Need Rs. 4 lakh cash for 3 months. Option A: break FD to lose interest + pay pre-maturity penalty (typically 1% of FD value). Option B: overdraft against FD at 8% for 3 months to pay Rs. 8,000 interest, keep FD running. Option B wins by ~Rs. 16,000. And this is before factoring in pre-maturity interest-rate reduction on the broken FD. OD against FD is the most underused liquidity tool for FD-heavy households.

By the end, you will know the OD-against-FD math, the typical rate structure, the pre-maturity vs OD break-even, and the two cousin facilities (OD against shares, OD against salary).

OD against FD mechanics

Bank grants overdraft limit = 90% of FD value (varies 85-95% by bank). Interest is charged ONLY on amount DRAWN, ONLY for DAYS drawn. Not on the full sanction limit. Rate = FD rate + 1-2% spread (so if your FD earns 7%, OD costs 8-9%). Crucially: FD continues to earn interest; nothing is prematured. Documentation: one-time lien on FD, usually set up at account opening or within 2-3 days.

Withdraw and repay flexibly. Draw Rs. 2L on day 1, repay Rs. 1L on day 10, draw Rs. 3L on day 20. Interest accrues on the running balance. This is much more flexible than a term loan; it is a revolving-credit facility against a deposit.

The break-even vs pre-maturity

Pre-maturity FD break loses: (a) pre-maturity penalty ~1% of FD value, (b) REDUCED INTEREST RATE for the holding period (banks reduce the applicable rate by 1-1.5% below the booked rate if broken early. So a 12-month FD booked at 7% becomes 5.5-6% effective for the actual months held). Combined pre-maturity cost ~2-2.5% of FD value.

OD cost: ~1-2% spread over FD rate, only on drawn amount, only for days drawn. If you need cash for < 2/3 of remaining FD tenure, OD usually wins. For longer borrowing horizons relative to FD tenure, pre-maturity break may be comparable or better.

OD against shares / mutual funds

Similar concept, different collateral: pledge your demat shares or MF units, bank grants OD limit of 50-60% of portfolio value (RBI cap). Rate: 10-12%, higher than OD against FD due to market volatility of underlying. Use case: short-term liquidity without selling (and triggering capital-gains tax event). A Rs. 50 lakh equity portfolio can generate Rs. 25-30 lakh OD limit; draw as needed for short-term liquidity.

OD against salary: some banks offer overdraft equal to 3-6x monthly salary credited to the account. Rate: 11-14%. Useful for gig-economy professionals or freelancers with irregular cash flow. Less favourable than OD against FD due to higher rate and no asset backing.

OD against mutual funds / shares

Similar facility: 50-60% LTV on mutual fund / share portfolio. Rate 10-12%. Useful for short-term liquidity without selling (avoiding capital gains tax event). Available at most major brokers (Zerodha, Upstox, ICICI Direct) as loan-against-securities.

OD against mutual funds / shares

Similar facility: 50-60% LTV on MF / shares portfolio. Rate 10-12%. Preserves investment compounding while accessing short-term liquidity without selling.

OD interest is daily compounded

OD interest compounds daily, same as cards. A Rs. 2L OD drawn for 90 days at 9% costs ~Rs. 4,500 interest. Modest, but scales if you roll over. Set a mental deadline to clear OD; it is a bridge, not a permanent loan.

Salary overdraft for gig workers

Banks offer 3-6x monthly salary as OD for salaried accounts. At 11-14%, higher than FD-OD but accessible without deposit. Useful for freelancers / gig workers managing irregular cash flow between invoices.

Key Takeaways

OD against FD: 90% LTV, FD-rate + 1-2% spread.
Interest only on drawn amount, only for days drawn.
Better than pre-maturing FD for short-term need.
OD against shares / MF also exists at 50-60% LTV.
Keeps your investment compounding undisturbed; use as 2-6 month bridge, not chronic borrowing.