Short answer: An overdraft is a pre-approved limit attached to an account that lets you withdraw more than your balance, up to that limit, and pay interest only on the amount you actually use for the days you use it. It is secured when backed by a fixed deposit, property, shares or mutual funds, and unsecured when based on your salary or business cash flow. It suits short, uncertain cash needs; for a fixed one-time expense, a term loan with an EMI is often simpler and can be cheaper.
Last updated: 13 October 2026.
This guide explains the types of overdraft in India, how interest is calculated, worked ₹ examples, costs to watch and how an overdraft compares with a personal loan or credit line.
How an overdraft works
- The bank or NBFC sanctions a limit, say ₹2,00,000, usually for 12 months, renewable.
- You draw money through cheques, transfers, UPI or a card linked to the account whenever you need it.
- Interest is calculated daily on the outstanding (debit) balance and debited monthly.
- Deposits into the account reduce the outstanding balance immediately, cutting interest from that day.
- At renewal the lender reviews your income, security and conduct and may renew, reduce or close the limit.
Types of overdraft
| Type | Security | Typical limit | Who it suits |
|---|---|---|---|
| Overdraft against fixed deposit | Your FD is marked as lien | A large share of the FD value, often 75–90% | Anyone with an FD who wants to avoid breaking it |
| Salary overdraft | None; based on salary credits | A multiple of monthly net salary | Salaried customers with a salary account at the bank |
| Overdraft against property | Residential or commercial property | Based on property value and income | Self-employed and business owners with larger needs |
| Overdraft against shares or mutual funds | Pledged securities | After the lender’s margin | Investors who do not want to sell |
| Business overdraft / cash credit | Stock, receivables, property or unsecured | Based on turnover and working capital need | MSMEs managing working capital |
| Personal credit line (digital) | Usually none | Small to moderate | Salaried users wanting app-based access |
Digital personal credit lines work like an overdraft but sit with an NBFC or bank partner; compare them on our personal credit lines comparison and credit line apps pages. Securities-backed limits are covered under loan against mutual funds and loan against shares.
How interest is calculated: worked examples
Interest = outstanding balance × annual rate × number of days ÷ 365.
- Example 1: You use ₹1,00,000 of a salary overdraft at 12% for 20 days and repay on payday. Interest ≈ ₹1,00,000 × 12% × 20 ÷ 365 = about ₹658.
- Example 2: You draw ₹50,000 for 30 days and another ₹1,50,000 for 15 days at 12%. Interest ≈ ₹493 + ₹740 = about ₹1,233.
- Compare: a ₹1,00,000 personal loan at 14% for 12 months costs roughly ₹7,700 in interest even if you only needed the money for a few weeks, unless you foreclose early.
That is the key advantage: you pay for usage, not for the full limit. The flip side is discipline. If the balance stays near the limit month after month, an overdraft can cost more than a term loan and the lender may reduce it at renewal. Our explainer on flat vs reducing balance rates helps compare quotes.
Example: FD overdraft vs breaking the FD
Say you have a ₹5,00,000 FD earning 7% with a year left, and you need ₹2,00,000 for two months. Breaking the FD usually means a lower rate for the period already completed plus a premature withdrawal penalty on the whole deposit. An overdraft against the FD at, say, 8.5% (often 1–2% above the FD rate) for 60 days costs about ₹2,795 in interest, and your FD keeps earning its original rate. Once you repay, the lien stays but the balance is zero, ready for the next need.
Costs and terms to check
- Rate and benchmark: many bank overdrafts are linked to an external benchmark such as the repo rate. The RBI raised the repo rate to 5.50% on 7 October 2026 (RBI statement), so linked overdraft rates can rise at the next reset.
- Processing and renewal fees: charged at sanction and often again at each annual renewal.
- Non-utilisation or commitment fees: some lenders charge if you rarely use the limit.
- Penal charges: charged if you exceed the limit or do not service interest; RBI rules require these to be reasonable, disclosed and not added to the interest rate.
- Interest servicing: unpaid monthly interest is added to the balance and eats into your limit.
- Credit reporting: overdrafts are reported to credit bureaus; persistent overuse or irregular accounts hurt your score. See our credit score hub.
Overdraft vs personal loan vs credit card
| Feature | Overdraft | Personal loan | Credit card |
|---|---|---|---|
| Interest charged on | Amount used, daily | Full loan from day one | Revolving balance after the free period |
| Repayment | Flexible; interest monthly | Fixed EMIs | Minimum due monthly |
| Best for | Uncertain or recurring short gaps | One-time known expense | Short purchases repaid in full |
| Typical cost | Moderate | Moderate to high | Very high if revolved |
| Discipline risk | High if balance never comes down | Low; EMIs force repayment | High |
For a defined expense, an unsecured personal loan gives a fixed end date. For a sudden need until payday, compare an overdraft with an advance salary loan or our guide to emergency loans.
Overdrafts for businesses
For MSMEs, an overdraft or cash credit limit is the standard working-capital tool: you draw to pay suppliers and salaries and repay as customers pay. Lenders size the limit on turnover, receivable days and banking conduct. If you need money for a fixed short project instead, read about short-term business loans and other options in our business loans hub.
How to apply
- Start with your own bank: an FD or salary overdraft is often pre-approved.
- Keep KYC, income proof (salary slips or ITRs) and recent bank statements ready.
- For secured overdrafts, submit FD details, property papers or a pledge request for securities.
- Read the sanction letter and Key Facts Statement: rate, benchmark, fees, renewal date and penal charges.
- Set a personal rule, such as clearing the balance every quarter, before you draw.
Need flexible funds? Compare credit lines and loan offers from RBI-regulated lenders.
If a lender levies charges you did not agree to, complain to the lender first and then escalate under the RBI Integrated Ombudsman Scheme if it is unresolved after 30 days.
Frequently asked questions
Do I pay interest on the full overdraft limit?
No. Interest is charged only on the amount you have drawn, for the days it is outstanding. Some lenders charge a separate fee for unused limits.
Is an overdraft against FD a good idea?
It is usually cheaper than breaking the FD if you need money briefly, because you keep earning FD interest and the overdraft rate is typically a little above the FD rate.
Does an overdraft affect my credit score?
Yes. It is reported like other credit. Using it within the limit and servicing interest on time helps; staying over the limit or irregular servicing hurts.
Can the bank reduce or cancel my overdraft?
Yes, at renewal or earlier under the agreement’s terms, for example if your income, security or account conduct changes.
Is an overdraft better than a personal loan?
For short or unpredictable needs, often yes. For a single known expense repaid over years, a personal loan’s fixed EMIs are usually easier to manage.
Sources
Disclosure: FundsTiger (Gatimaan Finance Advisors Pvt. Ltd.) is a loan marketplace and lending service provider for RBI-regulated lenders. Aparampaar Finance Pvt. Ltd. (Omozing), one of those lenders, is a related party of FundsTiger. This article is general information, not financial advice. Read your loan agreement and KFS before you decide.