Business Overdraft in 2026: Types, Interest on What You Use, Fees and Renewal

A business overdraft is the most flexible money a bank will lend you: draw it the day a GST payment or salary run is due, put it back the day a customer pays, and pay interest only for the days in between. But overdrafts come in very different forms — against a fixed deposit, against property, on your GST returns, or unsecured — and the cheapest-looking one is not always the cheapest once fees are counted. This guide compares the types, shows exactly how interest on the utilised amount is calculated, and walks through renewal and the RBI rules that apply from April 2026.

Quick answer

A business overdraft (OD) lets your current account go below zero up to a sanctioned limit, usually for 12 months at a time. You pay interest only on the daily balance you use. Secured ODs (against an FD or property) are cheapest; GST-based and unsecured ODs need no collateral but cost more and carry fees on the full limit.

• OD against FD: usually up to 90% of the deposit; rate = FD rate + a margin

• OD against property: HDFC Bank goes up to ₹10 crore; no stock statements

• GST-based OD: HDFC up to ₹2 crore, ICICI up to ₹5 crore

• Unsecured OD at Axis Bank is priced at repo + 12.50%–14.75%; secured OD at repo + 5.25%–5.40%

• Balance above limit for 90 days makes the account an NPA

How a business overdraft works

The bank sets a limit on your current account — say ₹10 lakh. Your balance can go from plus to minus as you pay bills, down to −₹10 lakh. Every deposit reduces the debit balance immediately. At the end of each day the bank notes the debit balance, applies the daily rate, and at month-end debits the total interest to the account.

Three features separate an OD from a term loan. There is no fixed repayment schedule — you clear it when you can, though the bank expects regular credits. Interest is on usage, not the limit — an unused limit costs you no interest, though it may cost fees. And the limit is temporary — sanctioned for a period, usually 12 months, and then reviewed and renewed.

An overdraft differs from a cash credit limit mainly in security. Cash credit is secured by hypothecation of your stock and receivables, so you must file a stock statement every month and your drawing power moves with it. An OD is secured by something else — a deposit, a property, or nothing — so there is no stock statement and the full limit is available from day one. That is why overdrafts suit consultants, agencies, contractors, clinics and other service businesses that hold little stock.

The main types of business overdraft

Overdraft against a fixed deposit

You place money in a fixed deposit, link it to your current account, and the bank lets you overdraw against it. HDFC Bank and ICICI Bank both advertise limits of up to 90% of the deposit value; HDFC's minimum is an FD of ₹25,000 held for at least 6 months and 1 day, and ICICI requires a corporate current account with it and offers the facility only on callable (premature-withdrawable) deposits. The FD keeps earning its contracted interest, and the bank marks a lien on it.

Pricing is a margin over the deposit rate. HSBC India's published terms, for instance, charge 2% a year over the weighted FD rate on the overdrawn amount, capped at the bank's prime lending rate, and treat anything above 90% of the deposit as an unauthorised overdraft at a higher rate. Because your deposit is still earning, the net cost of an FD-backed overdraft is roughly just the margin — far cheaper than breaking the deposit, which forfeits part of the interest and may attract a premature-withdrawal penalty.

How an FD-backed overdraft works

Step 1

Place FD and link it to current account

Step 2

Bank marks lien; limit up to 90% of FD

Step 3

Draw when needed — FD keeps earning

Step 4

Repay from collections

interest only for days used

Overdraft against property

You mortgage a residential, commercial or industrial property and get a revolving limit instead of a fixed loan. HDFC Bank's Overdraft Against Property goes up to ₹10 crore, needs no monthly stock statements, and is open to micro, small and medium enterprises at least three years old with a valid Udyam certificate and a one-year current-account relationship with the bank. The paperwork is the same as for a loan against property: title documents, valuation, legal report, and stamp duty on the mortgage. Use it when you need a large, long-running limit and are comfortable putting property on the line.

GST-based overdraft

Banks now set limits from GST returns and banking turnover instead of audited financials. HDFC Bank's GST Overdraft is for micro and small businesses with Udyam registration, at least three years of operations and GST returns filed for the past 36 months; its headline says funding up to ₹2 crore, though an FAQ on the same page still says ₹1 crore — confirm the figure with the bank. ICICI Bank's Working Capital basis GST returns offers up to ₹5 crore as an OD, letter of credit or bank guarantee, but lists property documents among accepted collateral, so "GST-based" does not always mean collateral-free above smaller amounts.

Remember the RBI rule: banks must not take collateral on loans of up to ₹20 lakh to micro and small enterprises sanctioned or renewed from 1 April 2026. If your GST OD is within that amount and you are an MSE, a demand for property security is against the rule.

Unsecured and instant overdrafts

Digital, collateral-free ODs for existing current-account customers have multiplied. ICICI Bank's InstaOD offers up to ₹50 lakh to existing current-account holders and ₹25 lakh to new customers, for a 12-month tenure, with a credit score above 725 and two years' business vintage required. Kotak's Digi OD goes up to ₹15 lakh, and HDFC Bank's Dukandar Overdraft for shopkeepers goes up to ₹10 lakh without stock statements, priced at 50 paise a day per ₹1,000 used.

These are convenient but expensive. Axis Bank's published grid prices unsecured OD at repo plus 12.50%–14.75%, compared with repo plus 5.25%–5.40% for its secured overdraft.

Business overdraft types compared

Type	Security	Typical limit (published examples)	Pricing basis	Best for
Against FD	Lien on your deposit	Up to 90% of the FD	FD rate + margin (HSBC: + 2%)	Short gaps when you hold surplus cash in FDs
Against property	Mortgage of property	Up to ₹10 crore (HDFC)	Repo or EBLR + spread	Large, long-running limits
GST-based	Usually none for smaller limits	Up to ₹2 crore (HDFC); ₹5 crore (ICICI)	Repo + spread by rating	MSEs with steady GST filings
Unsecured / instant	None	₹15 lakh (Kotak) to ₹50 lakh (ICICI)	Axis: repo + 12.50%–14.75%	Small, occasional needs
Cash credit (for contrast)	Stock and debtors	Based on turnover and drawing power	Axis: repo + 4.95%–5.20%	Traders and manufacturers

Against FD

Security

Lien on your deposit

Typical limit (published examples)

Up to 90% of the FD

Pricing basis

FD rate + margin (HSBC: + 2%)

Best for

Short gaps when you hold surplus cash in FDs

Against property

Security

Mortgage of property

Typical limit (published examples)

Up to ₹10 crore (HDFC)

Pricing basis

Repo or EBLR + spread

Best for

Large, long-running limits

GST-based

Security

Usually none for smaller limits

Typical limit (published examples)

Up to ₹2 crore (HDFC); ₹5 crore (ICICI)

Pricing basis

Repo + spread by rating

Best for

MSEs with steady GST filings

Unsecured / instant

Security

None

Typical limit (published examples)

₹15 lakh (Kotak) to ₹50 lakh (ICICI)

Pricing basis

Axis: repo + 12.50%–14.75%

Best for

Small, occasional needs

Cash credit (for contrast)

Security

Stock and debtors

Typical limit (published examples)

Based on turnover and drawing power

Pricing basis

Axis: repo + 4.95%–5.20%

Best for

Traders and manufacturers

How interest on the utilised amount is calculated

Interest on an overdraft is calculated on the debit balance at the end of each day, at the annual rate divided by 365, and the month's total is debited to your account — HSBC's terms, for example, debit it at the beginning of the next month. Nothing is charged on the unused part of the limit.

The formula is simple: interest for the month = sum of daily debit balances × annual rate ÷ 365. The sum of daily balances is sometimes called the "product" in bank statements.

If you don't pay the debited interest, it adds to the balance and you pay interest on it next month — in effect, monthly compounding. And if the balance crosses the limit, banks charge penal or default interest on the excess; HDFC Bank lists 18% a year on overdue CC/OD accounts.

Worked example 1: overdraft against an FD

Arjun runs a design consultancy in Bengaluru and keeps ₹20 lakh in a fixed deposit as a reserve. His bank allows an OD of up to 90% — ₹18 lakh. Suppose his FD earns 6.50% (an illustrative rate — check your own deposit) and the bank's OD margin is 2% over the FD rate, as in HSBC's published terms. His OD rate is then 8.50%.

A client delays payment and Arjun draws ₹6 lakh for 45 days to pay salaries and GST.

• OD interest = ₹6,00,000 × 8.50% × 45 ÷ 365 = ₹6,288
• His FD keeps earning 6.50% on the full ₹20 lakh throughout
• So the net cost of the borrowing is the 2% margin: ₹6,00,000 × 2% × 45 ÷ 365 = ₹1,479

Breaking the FD instead would have cost him the difference between the contracted rate and the lower rate for the period actually held, plus any premature-withdrawal penalty on the whole deposit — almost always more than ₹1,479.

See how unpaid OD interest compounds month on month

Initial InvestmentMonthly ContributionAnnual ReturnDurationCompounding

YearlyQuarterlyMonthly

Total Invested₹6,00,000.00

Interest Earned₹53,034.54

Growth8.84%

Future Value₹6,53,034.54

Open the full Compound Interest Calculator (PDF, save, compare)

Worked example 2: an unsecured overdraft you rarely use

Priya, a saree trader in Surat, takes a ₹10 lakh unsecured shopkeeper OD priced at 50 paise a day per ₹1,000 used, the published rate on HDFC Bank's Dukandar Overdraft — that works out to about 18.25% a year. The bank's schedule allows a processing fee of up to 2% on unsecured shopkeeper loans; assume the full 2%.

• Processing fee: 2% × ₹10,00,000 = ₹20,000, plus 18% GST = ₹23,600, charged on the limit whether she uses it or not
• She uses an average of ₹4 lakh for 120 days in the year: ₹4,00,000 ÷ 1,000 × ₹0.50 × 120 = ₹24,000 interest
• Total cost: ₹47,600 for using ₹4 lakh for four months — an effective rate of about 36% a year on the money she actually used

The lesson: on an unsecured OD, fees on the sanctioned limit can matter as much as the interest. Ask for a limit close to what you will actually use, and check whether the renewal fee is charged again next year. ICICI Bank's InstaOD, for example, lists a processing fee of 2% of the sanctioned limit and a renewal fee of 2% plus taxes.

Fees, charges and the Key Facts Statement

Before you sign, get the Key Facts Statement and check:

• Processing fee — usually a percentage of the sanctioned limit
• Renewal fee — charged each year (HDFC lists up to 1% of the facility plus taxes; ICICI InstaOD 2% plus taxes)
• Commitment or non-utilisation charge — some banks charge on the unused part of large limits
• Penal or default interest — on amounts above the limit or overdue
• Stamp duty — on the OD agreement and, for property ODs, on the mortgage, as per your state's Stamp Act
• Valuation and legal fees — for property-backed ODs
• Foreclosure or closure charges — ICICI says InstaOD has none; check yours

Renewal, review and the NPA rules

Most business ODs are sanctioned for 12 months. At renewal the bank looks at the turnover through the account, whether you stayed within the limit, your latest GST returns and financials, your credit score, and — for property ODs — whether the property's value still supports the limit. A well-run OD is usually renewed with little paperwork; ICICI says renewal of its GST working capital is mostly paperless.

An FD-backed overdraft works differently: it lasts as long as the linked deposit. When the FD matures, the bank adjusts the OD balance first, so either renew the FD or clear the OD before maturity.

The RBI asset-classification rules that apply to cash credit apply equally to overdrafts:

• The account is out of order if the balance stays above the limit for 90 days, or there are no credits for 90 days, or credits during the previous 90 days don't cover the interest debited. An out-of-order OD is an NPA.
• An OD whose limit is not reviewed or renewed within 180 days of the due date is treated as an NPA.

The practical consequence: an OD that sits fully drawn with only interest being serviced is a warning sign. Make sure real business receipts flow through the account every month.

Getting and keeping a business overdraft

1. 1

   Choose the type

   FD-backed if you hold surplus deposits; property-backed for large limits; GST-based or unsecured for small, occasional needs.

2. 2

   Prepare documents

   KYC of the business and owners, Udyam certificate, GST registration and 12–36 months of returns, 6–12 months of bank statements, ITRs or financials, and property papers if relevant.

3. 3

   Compare the full cost

   Ask each bank for the rate (benchmark + spread), processing fee, renewal fee and any non-utilisation charge. Work out the cost at your expected usage.

4. 4

   Route your receipts through it

   Deposit customer collections into the OD account so the balance and interest fall immediately.

   Tip: Regular credits are what keep the account 'in order' under RBI's rules.

5. 5

   Renew on time

   Submit renewal papers before the limit expires; a limit not renewed within 180 days of the due date can turn the account into an NPA.

RBI's rules on which bank may hold your OD account

From 1 April 2026, RBI's revised directions on current, cash credit and overdraft accounts decide which banks may maintain them for a borrower. If your total sanctioned exposure from the banking system — fund-based plus non-fund-based — is below ₹10 crore, any bank may keep your current or OD account without restriction. At or above that level, only a bank holding at least 10% of your banking-system exposure may maintain a current or OD account; other banks can keep only collection accounts that sweep money to your designated account within two working days. Cash credit accounts are not restricted. Banks must review compliance at least once every half-year.

For most small businesses this changes nothing. But if you are growing past ₹10 crore of total limits across banks, plan which bank will hold your operating account before you take a new OD from a third lender.

Common mistakes and how to fix them

Using an OD to buy fixed assets. An overdraft repaid only from future profits over several years is really a term loan in disguise. Banks see a permanently drawn OD at renewal and may cut it. Fund machinery with a term loan.

Taking a bigger limit than you need. Fees are on the limit. A ₹25 lakh limit you use at ₹3 lakh costs fees on ₹25 lakh. Ask for what your cash-flow forecast supports.

Letting the FD mature against an open OD. The bank will adjust the deposit against your balance and the facility ends. Renew the FD or close the OD first.

Ignoring the out-of-order rule. Even if you pay interest every month, an OD that is continuously fully drawn with no real credits can be classified as NPA. Run receipts through it.

Agreeing to collateral the rules don't allow. For micro and small enterprises, banks may not take collateral for loans up to ₹20 lakh sanctioned or renewed from 1 April 2026. Raise it at renewal.

Official links

• RBI Chapter XIA — current, CC and OD account rulesEffective 1 April 2026
• RBI Lending to MSME Sector (Amendment) Directions, 2026Collateral-free limit of ₹20 lakh for MSE loans
• RBI FAQs on MSME lendingExternal benchmark pricing, collateral-free loans
• RBI Complaint Management SystemEscalate unresolved complaints about charges or collateral

What to do next

Write down the three or four months each year when cash is tightest and how much you need in each; that tells you the size and type of overdraft that fits. If you hold inventory, compare the OD with a cash credit limit; if your gap comes from slow-paying large buyers, TReDS may be cheaper than any overdraft; and if you need a long-term sum, look at a loan against property or an unsecured business loan instead. Use the working capital calculator to size the gap first.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is a business overdraft facility?

A business overdraft lets your current account go below zero up to a sanctioned limit. You withdraw only when you need money, repay whenever cash comes in, and pay interest only on the amount actually used, calculated on the daily balance. The limit is usually sanctioned for 12 months and renewed. It can be secured by a fixed deposit or property, or unsecured on the strength of GST returns and banking.

How much overdraft can I get against a fixed deposit?

Typically up to 90% of the deposit. HDFC Bank and ICICI Bank both advertise up to 90% of the FD value, and HDFC requires a minimum deposit of ₹25,000. The FD keeps earning interest while you use the overdraft, and the bank holds a lien on it. Interest on the OD is set as a margin over the FD rate — HSBC India's published terms, for example, charge 2% a year over the weighted FD rate.

What is a GST-based overdraft?

It is an overdraft whose limit is set from your GST returns and banking turnover rather than audited financials or collateral. HDFC Bank's GST Overdraft, for micro and small enterprises with Udyam registration, three years in business and 36 months of GST returns, advertises up to ₹2 crore. ICICI Bank's working capital basis GST returns goes up to ₹5 crore, though it lists property among accepted collateral.

Is overdraft interest charged on the full limit?

No. Interest is charged only on the daily debit balance you actually use, and debited monthly. But fees are usually charged on the sanctioned limit: ICICI Bank's InstaOD, for example, carries a processing fee of 2% of the sanctioned limit, whether or not you draw. If you rarely use the limit, fees can cost more than interest.

What happens if I exceed my overdraft limit or don't repay?

Withdrawals above the limit attract penal or default interest — HDFC Bank lists 18% a year on overdue CC/OD accounts. If the balance stays above the limit for 90 days, or there are no credits for 90 days, or credits don't cover the interest, the account is 'out of order' and becomes an NPA, which damages your credit score.

Is a business overdraft better than a cash credit limit?

For service businesses and firms with little stock, usually yes, because there are no monthly stock statements. For traders and manufacturers with large inventory, a cash credit limit secured by stock is often bigger and cheaper. Some banks also offer stock-statement-free overdrafts for small shopkeepers, such as HDFC Bank's Dukandar Overdraft up to ₹10 lakh.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.HDFC Bank — Overdraft Against Fixed Deposits — HDFC Bank · accessed 9 October 2026
2. 2.ICICI Bank — Overdraft against FD (business banking) — ICICI Bank · accessed 9 October 2026
3. 3.HSBC India — SmartMoney Most Important Terms and Conditions — HSBC India · accessed 9 October 2026
4. 4.HDFC Bank — GST Overdraft Loan — HDFC Bank · accessed 9 October 2026
5. 5.HDFC Bank — Overdraft Against Property — HDFC Bank · accessed 9 October 2026
6. 6.HDFC Bank — Dukandar Overdraft Facility — HDFC Bank · accessed 9 October 2026
7. 7.ICICI Bank — InstaOD — ICICI Bank · accessed 9 October 2026
8. 8.ICICI Bank — Working Capital basis GST returns — ICICI Bank · accessed 9 October 2026
9. 9.Axis Bank — Small Business Banking Rate Grid — Axis Bank · accessed 9 October 2026
10. 10.RBI (Commercial Banks – Credit Risk Management) Amendment Directions, 2025 — Chapter XIA — Reserve Bank of India · accessed 9 October 2026
11. 11.Lending to MSME Sector (Amendment) Directions, 2026 — RBI/2025-26/206 — Reserve Bank of India · accessed 9 October 2026
12. 12.RBI FAQs on MSME lending (Q.10 interest, Q.11 collateral) — Reserve Bank of India · accessed 9 October 2026
13. 13.Consumer education literature on SMA and NPA classification — Union Bank of India · accessed 9 October 2026