If you hold a fixed deposit and need money, borrow against it rather than break it. The bank marks a lien on the deposit, the deposit keeps running at its contracted rate, and it lends you cash priced at a small spread over that rate. Because the deposit carries on earning, the interest you pay is almost entirely offset by interest you continue to receive — so the net cost of the borrowing is the spread, not the loan rate.
That makes a loan against an FD one of the cheapest borrowings a retail customer in India can get, and it is used far less than it should be. The trade-off is real, though: the deposit is frozen, the facility is available only from the bank holding it, and if the need is permanent rather than temporary the arithmetic eventually flips towards simply breaking the deposit.
The two shapes it comes in
Banks offer this in two forms, and choosing the wrong one is the commonest way to overpay.
An overdraft against the deposit. The bank sanctions a limit and links it to your current or savings account. Interest is charged only on what you actually draw, and only for the days you have it drawn. Draw ₹1,00,000 for eleven days and you pay eleven days of interest on ₹1,00,000. A sanctioned limit sitting untouched costs nothing in interest, though many banks charge a small annual renewal fee, so ask.
A demand loan. The full amount is disbursed at once and interest runs on the whole sum from day one. This is the right shape for a single known payment on a known date — a fee, a booking amount, a tax instalment.
For anything uncertain in size or timing the overdraft wins outright, and it is worth insisting on. A ₹5,00,000 demand loan taken because you might need ₹5,00,000 charges you interest on money that never left the account.
Why the real cost is the spread
The pricing rule is what makes this product unusual. The rate is set as your deposit’s own contracted rate plus a spread — a margin fixed by each bank, varying enough between banks, and between deposit sizes at the same bank, that no figure quoted in an article would be safe to plan around. Ask your branch what spread it applies, and get it on the sanction letter.
Now follow the money. You pay the deposit rate plus the spread on what you borrow. Over the same period you continue to receive the deposit rate on that same money, because the deposit was never touched. The two deposit-rate legs cancel, leaving the spread, on the amount drawn, for the days drawn.
That is why, measured on net cost rather than headline rate, a loan against an FD undercuts every other retail credit product. A personal loan charges an unsecured rate on the full amount with nothing coming back the other way. Here, most of the interest you pay is money you were earning anyway. One honest qualification: the offset is not perfect for a taxpayer, because the deposit interest is taxable while the loan interest on a personal borrowing is not deductible against it.
Against breaking the deposit: a worked example
Breaking a fixed deposit costs more than most people expect, and the reason is retrospective. Under the RBI (Commercial Banks — Interest Rate on Deposits) Directions, 2025, where a term deposit is withdrawn prematurely, interest is payable at the rate applicable to the amount and the period for which the deposit actually remained with the bank — not the rate you contracted for. Banks must also maintain a board-approved policy on premature-withdrawal penalties and disclose its components when the deposit is accepted.
So you lose twice: the contracted rate is replaced by the shorter-tenure rate, applied to the whole deposit from day one, and a penalty is levied on top.
Take a ₹5,00,000 deposit booked for three years, twenty months in, and a need for ₹2,00,000 for four months. Assume a spread of 2 percentage points, and assume the rate for the twenty-month period actually run is half a percentage point below the contracted three-year rate. Those are illustrative assumptions, not quoted rates — put your own deposit’s numbers in their place.
| Borrow ₹2,00,000 | Break the deposit | |
|---|---|---|
| What you pay | Spread only, on ₹2,00,000 for 4 months | Rate reset on the full ₹5,00,000 for 20 months, plus penalty |
| Arithmetic | 2% × ₹2,00,000 × 4/12 | 0.5% × ₹5,00,000 × 20/12 |
| Cost | ≈ ₹1,333 | ≈ ₹4,167 plus penalty |
| Deposit afterwards | Intact, running to maturity | Gone; ₹3,00,000 to redeposit at today’s rate |
Borrowing costs roughly a third of breaking, and the gap is wider than it looks because the reset hits the entire deposit while the spread hits only the part you needed.
Where it flips towards breaking
The mechanism that reverses this is time. Breaking costs a one-off: you pay the reset and the penalty once and it does not grow. Borrowing accrues. Hold the loan long enough and the spread overtakes it.
On the numbers above, the spread costs about ₹333 a month. Set that against the ₹4,167 break cost and the crossover sits near twelve and a half months, before the penalty. The penalty pushes the crossover out; tax pulls it in, because the interest you forfeit by breaking is income you are never taxed on, while the spread you pay gets no relief. At a 30% marginal rate the crossover moves nearer nine months.
So: borrow when the need is short and you can name the money that repays it — a bonus, a receivable, a maturing investment. Break the deposit when the need is permanent, or when you cannot name the repayment source. Many banks permit partial premature withdrawal, which limits the reset to the portion taken; the policy differs bank by bank, so read the one that applies to you. An overdraft you never repay is the most expensive way to hold this product.
Model your deposit both ways on the FD calculator before deciding, and if you are comparing against an unsecured alternative, price the instalment on the personal loan EMI calculator.
The deposit stays yours, and stays taxable
A lien restricts disposal; it does not transfer ownership. The interest is still your income and is taxed in your hands exactly as it would be if you had never borrowed.
TDS follows the same rules. A bank deducts tax on your interest once it crosses ₹50,000 in a financial year, or ₹1,00,000 if you are a senior citizen — thresholds raised with effect from 1 April 2025. The rate is 10%, or 20% where PAN has not been furnished. Pledging changes none of this.
Two points people get wrong. TDS is not an extra tax; it is a prepayment credited against your final liability, and if too much was deducted you recover it by filing a return. And Forms 15G and 15H no longer exist — from 1 April 2026 the declaration for non-deduction is Form 121, and both age groups must have nil estimated tax liability and total income below the basic exemption limit to file it. Nil liability alone is not enough for seniors, despite what much published content still says. Our guide to tax on FD interest sets out the mechanics in full.
Limits, tenure and the deposits you cannot pledge
Four constraints decide whether the facility works for you at all.
Loan-to-value varies by lender. You get a percentage of the deposit’s value, not all of it; the margin the bank keeps covers accrued interest and any shortfall on liquidation. Banks set their own percentages and revise them without notice, so ask for the figure that applies to your deposit rather than trusting a number online.
A longer deposit may fetch a lower loan-to-value. The further the maturity, the more interest the bank has to cover if it appropriates early, so the margin it keeps tends to be larger.
Tenure is tied to the deposit’s remaining maturity. The loan cannot ordinarily outlive the collateral, so a deposit maturing in eight months will not support a three-year loan.
A five-year tax-saving fixed deposit cannot be pledged during the lock-in. The Bank Term Deposit Scheme, 2006, under which those deposits are issued, prohibits their being pledged to secure a loan, and banks decline the request for that reason. Since such a deposit also cannot be withdrawn early, a saver whose only deposit is a tax-saver has no access to it at all for five years — worth knowing before you route your tax-saving investment into one.
One further structural limit: the RBI Directions state that a bank shall not grant advances against term deposits maintained with other banks. The facility comes from the bank holding the deposit, so you cannot shop the spread around — though the spread itself is negotiable at the branch, particularly on a large deposit.
No score check, and what that does not mean
Because the bank is lending against its own liability, most lenders sanction these facilities without an income assessment or a credit-score cut-off. That makes it one of the few routes open to somebody with a thin file, a recent default, or income that will not document cleanly — the group covered in our guide to personal loans for the self-employed, where approval rather than pricing is the binding constraint.
It does not mean the loan is invisible. It is a credit facility from a regulated lender, so it is reported to the bureaus with its limit, its outstanding balance and your repayment record, and it can help a thin file the same way a credit card against an FD does. Miss payments and it hurts exactly like a personal loan would.
If you do not repay, the bank appropriates the deposit, sets it against the dues and returns any surplus. No agent, no court. The default still reaches your credit report, and any shortfall is still owed.
What to ask before you sign
Five questions, answered on the sanction letter rather than at the counter:
- The spread over your deposit rate, in percentage points, and whether it can be revised mid-facility.
- Overdraft or demand loan — and whether the bank will give you the overdraft if you ask.
- The loan-to-value applied to your specific deposit.
- The processing fee in rupees, plus any annual renewal fee on an overdraft.
- What repaying early costs. On floating-rate loans to individuals for non-business purposes, foreclosure and prepayment charges are not permitted — confirm how your facility is documented.
If you hold no deposit, the same logic runs across other collateral: a loan against mutual funds is cheaper than unsecured borrowing but carries a margin call the FD route does not, and a gold loan trades a similar collateral-value risk for faster disbursal. Neither is as clean. A fixed deposit cannot fall in value, so nobody can ever call you for a top-up — the quiet reason this is the sensible first place to borrow from.
Common questions
Does the fixed deposit keep earning interest while it is pledged?
Yes. Pledging creates a lien in the bank’s favour; it does not close the deposit or interrupt it. The deposit runs to its original maturity at its contracted rate and interest is credited on the usual cycle. That is precisely why the arrangement is cheap — the deposit’s own earnings offset most of what the loan charges. What you give up is access: you cannot break or withdraw the deposit, or renew it elsewhere, until the lien is released.
Will a loan against my FD be checked against my credit score?
Usually not in any meaningful way. The loan is fully covered by the bank’s own money, so most lenders sanction it without underwriting your income or applying a score cut-off, which makes it available to people who would be declined for an unsecured loan. It is still a credit facility, so it is reported to the bureaus with its limit, its balance and your repayment record — and missed payments damage your file the same as any other loan.
Can I take a loan against a five-year tax-saving fixed deposit?
No, not during the lock-in. The Bank Term Deposit Scheme, 2006, under which five-year tax-saving deposits are issued, bars them from being pledged to secure a loan, and banks decline the request for that reason. The deposit also cannot be withdrawn early, so there is no fallback. If a tax-saving deposit is the only one you hold, this route is closed to you until the five years are complete. Confirm with your bank before you plan around it.
What happens if I never repay the loan against my FD?
The bank invokes the lien and appropriates the deposit against the outstanding balance, returning any surplus. There is normally no recovery agent and no litigation, because the bank already holds the money. The comfortable part ends there: the default is still reported to the credit bureaus and stays on your report for years, and if the deposit does not cover the dues the shortfall remains payable. Being secured changes the recovery route, not the consequences.
Can I borrow from one bank against a deposit held at another?
No. The RBI (Commercial Banks — Interest Rate on Deposits) Directions, 2025 state that a bank shall not grant advances against term deposits maintained with other banks. So the facility has to come from the bank that holds the deposit, which removes any possibility of shopping the rate around. Your only real negotiating lever is the spread that bank applies over your deposit rate, and it is worth asking about.
Sources
Rates and rules on this page were read directly from the following sources on the dates shown. Figures change — if you are about to act on one, confirm it at the source.