Home construction costs have surged in recent years, rising nearly 40% since 2020 as material and labour prices continue to escalate. At the same time, fixed deposits (FDs) continue to anchor most household savings, with around 77% of individual financial assets still parked in bank deposits.
When faced with rising project costs, many homeowners naturally look to their FDs for liquidity. The challenge lies in choosing between breaking the deposit or taking a loan against fixed deposit, each with different consequences for interest earnings, liquidity, and long-term stability.
What is Premature Withdrawal of a Fixed Deposit?
Ending a deposit before its term provides quicker access to funds, though earnings are recalculated to reflect the actual duration. The bank revises the payable rate based on how long the amount remained invested and credits interest accordingly.
For example, if ₹1 Lakh is placed in a two-year deposit at 7% and withdrawn after one year, the bank may apply the one-year rate (say 6.5%) and adjust it further for a small penalty, bringing the effective return to around ~5.5%. The revised rate determines the final payout and reflects the shorter investment duration.
According to Reserve Bank of India norms, each entity follows its framework. Banks follow their own board-approved premature withdrawal policies, which vary slightly across institutions. Online marketplaces like Bajaj Markets help compare fixed deposit options and terms across issuers.
Whereas non-banking financial companies (NBFC) apply prescribed rules. if a fixed deposit is withdrawn after 6 months, the payable interest is reduced by up to 2% from the rate applicable for that period. If no rate exists for that tenure, it is calculated 3% below the minimum rate offered on public deposits by the NBFC.
Certain institutions also permit partial withdrawal, letting customers access only a portion while the remainder keeps accruing returns. This approach maintains liquidity without breaking the entire investment.
How a Loan Against Fixed Deposit Works
A loan against fixed deposit allows access to funds without breaking the original savings. The deposit serves as collateral, and the bank extends credit against its value, usually covering a substantial share of the amount. As it is a secured facility, approval tends to be quick and requires limited documentation.
The interest rate is slightly higher than the rate earned on the deposit, though the exact difference varies by bank. For instance, if an FD of ₹1 Lakh earns 6.5%, a borrower may access around 75% of the amount as a loan, with the interest set near 7%. The deposit continues to accrue returns during this time, ensuring that the investment remains productive while providing liquidity.
Banks usually offer this facility in two formats:
- Term Loan: A fixed sum is released at once, and repayment follows a schedule that generally aligns with the deposit’s tenure.
- Overdraft Facility: Withdrawals can be made whenever required, and interest accrues only on the utilised amount. This flexible method suits variable or short-term funding requirements.
Loan Against Fixed Deposit vs. FD Withdrawal
| Feature | Loan Against Fixed Deposit | FD Withdrawal |
| Access to Funds | Credit provided against the deposit value | Principal amount released immediately |
| Deposit Status | Remains active and continues to earn interest | Ceases to earn interest after withdrawal |
| Interest Rate / Cost | Slightly higher than FD rate, varies by bank | Reduced interest applicable for actual holding period |
| Documentation | Minimal, as it’s a secured facility | Not required beyond withdrawal request |
| Processing Time | Quick | Instant once withdrawal is initiated |
| Impact on Savings | Investment stays intact, wealth continues to grow | Future returns and compounding stop |
| Suitable For | Planned or short-term funding needs | Immediate cash requirements |
Which Option Works Better For Home Construction
The right choice between withdrawal and a loan against fixed deposit depends on how much you need, for how long, and the current interest environment. Each option has its place, the key is to match it with your construction timeline and repayment comfort.
When a Loan Against Fixed Deposit Works Better
- Ideal when your FD earns a higher rate than what’s currently available. It lets you retain that advantage while meeting funding needs.
- Suitable for short-term or phased construction, where payments happen in stages. You can borrow only what’s required and repay as funds become available.
- Helps avoid reinvestment risk and penalties from premature closure.
- Keeps your savings growing, as the FD continues to earn interest during the loan tenure.
When Withdrawal Makes More Sense
- Practical if the FD rate is lower than present market rates, allowing you to reinvest the balance at a better yield.
- Preferable when the amount needed is large or repayment is uncertain, as withdrawing avoids creating additional liabilities.
- Sensible if the deposit is nearing maturity and closing it doesn’t cause much loss in interest.
Conclusion
A balanced decision preserves both liquidity and long-term growth. For most homeowners, using a loan against fixed deposit ensures access to funds without disturbing future earnings. However, if repayment is uncertain or the deposit is close to maturity, withdrawal may be practical. Comparing available FD options and loan features on Bajaj Markets can help identify the most suitable route for financing home construction confidently and efficiently.
