Working Capital
What is Overdraft Facility? Meaning, Interest Rates & How OD Works
Sep 2, 2026
"What is overdraft facility?" is searched nearly 3,000 times a month in India. Here is a clear, jargon-free answer — plus the rates, eligibility and the OD vs cash credit decision most banks never explain properly.
Overdraft meaning: what is an overdraft facility in a bank?
An overdraft (OD) facility lets you withdraw more money than you actually hold in your current or savings account, up to a pre-approved limit. Think of it as a credit line attached to your bank account: the bank sanctions, say, ₹25 lakh, and you dip into it whenever business expenses exceed your balance.
- Pay interest only on what you use, for the days you use it.
- No fixed EMI — deposit money back anytime to reduce interest.
- Renewable annually, with the limit reviewed against your account conduct and financials.
How does an overdraft facility work?
Suppose your OD limit is ₹20 lakh and you withdraw ₹8 lakh for a supplier payment for 20 days. Interest is charged only on ₹8 lakh for those 20 days. Once your customer payment lands and the account goes positive, the interest clock stops. This flexibility is exactly why ODs suit businesses with uneven cash flows.
Types of overdraft facilities in India
- OD against FD: 1–2% above your deposit rate; instant and cheapest.
- OD against property (LAP-OD): limits in crores at 9–11% p.a., secured by residential or commercial property.
- Business OD (unsecured/turnover-based): 11–16% p.a., based on banking turnover and GST.
- Salary OD: small personal limits against salary credits.
Overdraft interest rates & charges (2026)
Bank overdraft rates for businesses typically sit between 9% and 16% p.a., plus a one-time processing fee (0.5–1%) and annual renewal charges. Secured ODs (FD or property) are dramatically cheaper than unsecured ones.
Is an overdraft facility good for your business?
Yes — if your cash gaps are short and unpredictable. For steady, predictable funding needs, a term loan is cheaper. For inventory-heavy trading, cash credit may fit better. The wrong product silently costs lakhs a year; a quick eligibility check across 48+ lenders tells you which structure your profile qualifies for.