Salary Overdraft: How it works, features, benefits, interest rates – Here’s all you need to know

Depending on the bank and the account, in most cases, the credit line ranges from one to three times the net monthly salary of the account holder.

Do you need fast cash or an instant credit line because of an unexpected expense or to deal with any unforeseen financial exigency? No need to worry if you are a salaried person and meet the eligibility criteria set by your bank if the bank offers the salary overdraft facility.

Salary overdraft is a form of revolving credit that you can avail on your salary account, wherein you can withdraw a particular amount over and above the balance in your salary account when you need it.

Many banks offer salary overdraft accounts to select existing salary account holders based on their credit profile and their employers’ profiles. Banks issue a pre-determined overdraft limit to such salary account holders, from which they can withdraw on facing fund shortages.

“The instant pre-approved nature of this facility makes it an excellent credit facility to deal with unforeseen financial exigencies. These salary overdraft accounts can also be extremely helpful for avoiding unintentional cheque, EMI or SIP bounces due to insufficient funds in the salary account,” informs Sahil Arora, Senior Director, Paisabazaar.com.

Overdraw amount: It may be noted that every bank has its own set of eligibility parameters to determine the extent of overdraft allowed. Depending on the bank and the account, in most cases, the credit line ranges from one to three times the net monthly salary of the account holder. However, in other cases, the overdraft may be restricted to 80-90% of the net salary.

“Banks also have a cap on the amount that they allow as overdraft regardless of the net salary. Some banks may cap the overdraft at Rs 3-5 lakh, while others may allow only a much smaller amount of around Rs 1-1.5 lakh regardless of the borrower’s income. Some banks may allow an overdraft of only Rs10,000-25,000 depending on their policies,” says Adhil Shetty, CEO, BankBazaar.com.

For instance, you can get up to three times your salary as an overdraft loan from HDFC Bank and ICICI Bank, while Citibank Suvidha Salary Account offers an overdraft facility up to 5 times your net salary credit (up to Rs 5 lakh).

However, not all salary accounts will have an overdraft option. Overdraft facility is extended at the bank’s discretion only to some select salary account holders based on their eligibility and credit history. There are usually processing fees when you open an overdraft account, as well as an annual renewal fee if you wish to revolve the credit beyond one year.

Salary overdrafts can be as expensive as credit cards as the average rate of interest can be anything from 1-3% per month or 12-30% per annum, depending on the bank. “Coupled with the processing fee and penalties in case of missed payments, this can be a very expensive form of credit. This is especially significant as unlike credit cards, they do not come with the benefits of exclusive offers or reward points nor do they offer an interest-free period every month to repay whatever amount that has been utilized,” says Shetty.

It may, however, be noted that interest is levied only on the drawn amount, and not on the entire sanctioned limit, for the period till their repayment. These accounts also offer higher repayment flexibility as the repayments are not made through EMIs.

“The account holders can repay the drawn amount in parts or in entirety as per their repayment capacity and without incurring any prepayment charges. However, those availing salary overdraft facility are usually required to service the interest component of the drawn amount on a monthly basis,” says Arora.