Fixed deposits (FDs) are one of the most preferred investment options in India due to their safety and assured returns. But what if you need money urgently and don’t want to break your FD? That's where a loan against fixed deposit comes in handy. It allows you to borrow money while your FD continues to earn interest.
In this comprehensive guide, we’ll cover everything you need to know about loans against fixed deposits — how they work, eligibility, benefits, interest rates, application process, and more.
What Is a Loan Against Fixed Deposit?
A loan against fixed deposit is a type of secured loan where your FD acts as collateral. Instead of breaking your deposit prematurely, you can borrow up to 90% of its value. This facility is offered by almost all banks and NBFCs in India.
For example, if you have a fixed deposit of ₹5,00,000, you can get a loan of ₹4,50,000 (or more, depending on the bank's policy).
Why Choose Loan Against FD?
Here are some compelling reasons why many people prefer a loan against FD:
1. Lower Interest Rates
Since the loan is secured, interest rates are usually 1–3% higher than the FD interest rate, making it one of the cheapest forms of borrowing.
2. Quick Disbursal
No complex documentation is required. Banks already hold your FD details, so the loan is disbursed almost instantly.
3. No Need to Break FD
You can meet urgent cash needs without sacrificing your investment or losing interest earnings.
4. Flexible Repayment
Repayment tenure can range from a few months to the FD’s maturity date. Many banks also offer overdraft facilities for better flexibility.
5. Continued Interest on FD
Even while your deposit is pledged, it keeps earning interest, maximizing your returns.
How Does a Loan Against FD Work?
When you opt for a loan against your FD:
- The bank marks a lien on your FD, which means you can’t withdraw it till the loan is repaid.
- You can either get the loan as a lump sum or as an overdraft facility.
- Interest is charged only on the amount used, especially in the overdraft option.
- Once the loan is repaid, the lien is removed and the FD is free again.
Eligibility Criteria
Eligibility is straightforward because you're pledging your own asset:
- You must hold a fixed deposit with the bank.
- FD should be in your name (or jointly held).
- Minimum FD amount may be required (usually ₹10,000 or ₹25,000).
- Some banks allow loans on tax-saving FDs only after the 5-year lock-in period.
Even minors (through guardians), HUFs, trusts, and companies can avail of this loan.
Documents Required
Since your FD is with the bank, you usually need minimal documentation:
- Loan application form
- FD receipt or number
- KYC documents (if not updated)
- Signature verification (if required)
If you're taking the loan from the same bank where your FD is held, it’s often just a one-step process.
Interest Rates
Interest rates vary by bank and are linked to your FD rate. Generally, the interest is:
- 1% to 3% above your FD rate
- Charged monthly or quarterly
- Reduced if you take only partial overdraft
Some examples (rates may change):
- SBI: FD rate + 1%
- HDFC Bank: FD rate + 2%
- ICICI Bank: FD rate + 2%
Check with your bank for exact rates.
Tenure and Repayment
The loan tenure is tied to the maturity period of your FD. For example:
- If your FD matures in 3 years, your loan can also be for up to 3 years.
- Repayment can be done via EMIs or lump sum.
- Overdrafts don’t require regular EMIs—you pay only for the amount and duration you use.
After loan closure, the lien is removed and you get your FD as usual.
Overdraft vs Term Loan Against FD
Overdraft
- Flexible withdrawal
- Pay interest only on the amount used
- Suitable for recurring cash needs
Term Loan
- One-time disbursal
- Fixed EMI payments
- Ideal for one-time expenses (medical bills, weddings, etc.)
Choose based on your cash flow and purpose.
Common Use Cases
Loan against FD is ideal when you:
- Need emergency funds
- Have low credit score and can't get unsecured loans
- Don’t want to break your FD prematurely
- Need to fund short-term personal or business needs
- Are retired or self-employed and need low-cost finance
Benefits Over Premature FD Withdrawal
Many people are tempted to break their FD during financial emergencies. But doing so has drawbacks:
- You lose interest (or face penalties)
- Lower return than expected
- Ends the compounding benefit
Instead, taking a loan against FD gives you:
- Access to funds
- Continued interest earning
- No penalty charges
Tax Implications
- Interest earned on FDs is taxable, whether you take a loan or not.
- Loan amount is not taxable, as it is not income.
- Interest paid on loan against FD is not eligible for tax deduction (unless used for business purposes).
Digital Availability
Most leading banks now offer online application for loans against FDs. The process is simple:
- Log in to your bank’s net banking or mobile app.
- Select the FD against which you want a loan.
- Choose loan type (overdraft/term loan) and amount.
- Submit your request.
- Amount is credited instantly.
Digital convenience makes it ideal for quick needs.
Limitations of Loan Against FD
Though beneficial, this type of loan has some limitations:
- Can borrow only up to 90% of FD value
- FD is locked until repayment
- Not useful if you need long-term or large funding
- Default can lead to FD being liquidated by the bank
Always repay on time to avoid losing your deposit.
Top Banks Offering Loan Against FD
Here are some popular Indian banks that offer this facility:
- State Bank of India (SBI)
- HDFC Bank
- ICICI Bank
- Punjab National Bank
- Axis Bank
- Kotak Mahindra Bank
- Bank of Baroda
- IDFC First Bank
All have slightly different rules, so it's wise to compare terms before applying.
Business Use of Loan Against FD
Businesses often park surplus funds in FDs. In times of need, they can:
- Borrow against those FDs
- Fund working capital
- Maintain liquidity
- Avoid taking costlier loans
Since there's no need for balance sheet scrutiny or income proof, it's a practical financial tool for SMEs and startups.
FAQs on Loan Against Fixed Deposit
Q1. What is the maximum amount I can borrow against my FD?
You can usually borrow up to 90–95% of your FD value. This limit varies by bank and FD type.
Q2. Does taking a loan against FD affect my credit score?
No, since it’s a secured loan. However, defaulting on repayment may impact your credit profile if reported.
Q3. Can I continue to earn interest on my FD after taking the loan?
Yes, your FD continues to earn interest as per the original terms.
Q4. Is there any processing fee?
Most banks charge a nominal fee or no fee at all, especially if you're an existing customer.
Q5. Can I prepay the loan before tenure?
Yes, loans against FD are prepayable without penalty in most cases.
Q6. What happens if I fail to repay?
The bank has the right to liquidate your FD to recover the dues.
Q7. Is PAN required for a loan against FD?
Yes, for high-value loans and for TDS compliance on interest, PAN is usually mandatory.
Q8. Can NRI customers get a loan against FD?
Yes, NRIs holding NRO fixed deposits can avail this loan in many banks.
Q9. Can I take a loan against tax-saving FDs?
Only after the 5-year lock-in period, and not all banks allow this.
Q10. Is loan against FD available in cooperative banks?
Yes, many co-operative and regional rural banks offer this facility, subject to internal rules.
Final Thoughts
A loan against fixed deposit is a cost-effective and convenient way to access funds without disrupting your savings. It offers quick disbursal, low interest rates, and high flexibility. Whether you’re a salaried professional, self-employed, or a business owner, this type of loan can be a reliable backup during financial emergencies.
Instead of breaking your FD and losing interest, consider this smart borrowing option. It not only preserves your investment but also gives you the liquidity you need.
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