F-14/15, Orbit Mall, Civil Lines, Jaipur-302006
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F-14/15, Orbit Mall, Civil Lines, Jaipur-302006 support@thetaxheaven.com
A loan against fixed deposit is one of the fastest ways to arrange short-term funds without breaking your savings plan. In India, banks and many NBFCs allow you to borrow against your FD while the deposit continues to earn interest. The main decision points are the borrowing limit, charges, and the loan against fixed deposit interest rate, because that cost decides whether the loan truly remains economical. When used with discipline, this facility can protect your liquidity and keep your long-term deposit intact.
A loan against fixed deposit is a secured loan where your fixed deposit acts as collateral. The lender marks a lien on the FD, which means you cannot close or withdraw it until the loan is repaid. Since the lender has security, approval is quicker and documentation stays light.
This loan is available against most bank FDs held in single or joint names. Some lenders also extend it against tax-saving FDs, but with stricter conditions due to the lock-in. The facility can be set up as an overdraft or as a term loan, depending on the bank.
When you take a loan against fixed deposit, the FD remains in your name and keeps earning FD interest as per the original contract. At the same time, the bank sanctions a credit limit or disburses a loan against that FD. Interest is charged only on the utilised loan amount, not on the total sanctioned limit in case of an overdraft.
The loan tenure generally matches the FD’s remaining maturity. If the FD matures before you repay, the bank adjusts maturity proceeds against the outstanding dues. Any balance amount is paid to you.
The loan against fixed deposit interest rate is usually linked to your FD rate, with a spread added by the lender. In many Indian banks, the spread ranges from about 0.5% to 2.0% per annum over the FD rate. This pricing is why a loan against fixed deposit is commonly cheaper than unsecured personal credit.
If your FD earns 7.00% per annum and your bank adds 1.50%, the loan against fixed deposit interest rate may be around 8.50% per annum. Some banks quote the loan against fixed deposit interest rate as “FD rate + spread”, while others publish a separate rate card.
In several cases, the loan against fixed deposit interest rate for an overdraft is similar to a term loan, but interest calculation differs:
- Overdraft: Interest is charged on daily utilised balance. This suits uneven cash flow needs.
- Term loan: Interest and instalments follow a schedule. This suits fixed repayment capacity.
If you only need Rs. 60,000 from a Rs. 2,00,000 limit, an overdraft-based loan against fixed deposit can reduce interest outgo because you pay the loan against fixed deposit interest rate only on Rs. 60,000.
A loan against fixed deposit has lighter charges than many retail loans, but you should still confirm the full cost. Many banks keep processing fees minimal or nil for this product, especially for existing customers. Still, policies differ across institutions.
Look for these cost items before you accept a loan against fixed deposit:
- Processing fee: Some banks charge a nominal percentage or a flat fee.
- Documentation charges: Usually small, but confirm.
- Penal interest: Applies if instalments or interest servicing is delayed.
- Stamp duty: May apply depending on facility type and state rules.
Even if the loan against fixed deposit interest rate looks attractive, penalties and delayed payments can raise the overall cost.
Eligibility for a loan against fixed deposit is simple because the deposit is the primary security. Most lenders require you to be the FD holder and to have the FD with them. Joint FDs may need consent from all holders depending on the operating instructions.
Documentation is also light for a loan against fixed deposit:
- KYC: PAN, Aadhaar, address proof as per bank norms.
- FD details: Receipt or FD account information.
- Loan application form: Bank format.
- Photograph and signature: As per account records.
Because the risk is lower, the lender focuses on lien creation and clear authorisation more than income proofs.
A loan against fixed deposit can be repaid in flexible ways, based on whether it is an overdraft or term loan. Many banks allow interest servicing monthly, with principal repayment at the end, but this varies.
Common repayment structures include:
- Interest-only during tenure, principal at closure: Useful for short cash gaps.
- EMI repayment: Suitable when you want predictable outflow.
- Overdraft sweep-in: You deposit money anytime to reduce utilisation and interest.
Since the loan against fixed deposit interest rate is charged on the outstanding balance, faster part-payments reduce cost quickly. If your bank permits, you can close the loan against fixed deposit early without major foreclosure charges, but confirm this in writing.
Many people compare a loan against fixed deposit with premature FD closure. The right choice depends on penalty, liquidity needs, and your tax position.
A loan against fixed deposit can be useful if you want to avoid premature withdrawal penalties and keep your deposit compounding. You also retain your original maturity plan, which helps if the FD was aligned to a goal.
However, you must compare the penalty saved versus the interest paid at the loan against fixed deposit interest rate. If the bank charges 1% penalty on premature withdrawal and your loan spread is 2%, the decision may change based on the time period and utilisation.
Assume an FD of Rs. 3,00,000 at 7% with 18 months remaining. You need Rs. 2,00,000 for 6 months.
- If you break the FD, you may lose interest due to penalty and revised rate for the broken tenure.
- If you take a loan against fixed deposit at a loan against fixed deposit interest rate of 8.5%, you pay loan interest for 6 months, while the FD continues to earn 7%.
The net cost is roughly the spread (here, 1.5%) on the borrowed amount for the borrowed period, plus any charges. This is why a loan against fixed deposit can work well for short, planned needs.
A loan against fixed deposit does not change the taxability of FD interest. FD interest remains taxable as per your income slab, and TDS may apply as per rules. The loan proceeds are not treated as income because they are borrowed funds.
Interest paid at the loan against fixed deposit interest rate is generally not eligible for deduction for salaried individuals using it for personal expenses. If you use the borrowed funds for business purposes, interest may be considered a business expense, subject to accounting treatment and tax provisions. For clarity, take advice from a qualified tax professional.
Most banks allow a loan against fixed deposit through branch and, in many cases, through internet banking or mobile banking if the FD is held in the same bank.
A simple process flow:
- Confirm eligible limit and the loan against fixed deposit interest rate offered for your FD.
- Choose facility type: overdraft or term loan.
- Submit request and provide consent for lien marking.
- Sign the loan documents and complete KYC if required.
- Receive disbursal to your bank account or activate overdraft limit.
If you have multiple FDs, some banks allow pooling for a single loan against fixed deposit, which can improve flexibility.
A loan against fixed deposit is a practical credit option for Indians who need funds quickly but do not want to disturb their deposit and its maturity plan. The key is to evaluate the loan against fixed deposit interest rate, charges, and repayment structure, then borrow only what you can repay comfortably. When used for short-term needs and repaid on time, a loan against fixed deposit can protect liquidity while keeping your savings journey on track.
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