What is an Auto Sweep Facility? – Working, Taxation and Uses
A lot of people have money lying in their savings account earning a mere 3% to 4% annual rate of interest and most of them are not aware of the products offered by the banks to grow money, one of which is having an auto-sweep account. It gives the ease of withdrawing money i.e liquidity and at the same time earning a higher rate of interest on fixed deposits tied to the savings bank account
This blog will take you through all the necessary points about auto sweep accounts, their benefits, taxability and difference from regular FD’s. Read on to know more!
What is an Auto Sweep Facility?
Auto sweep is a feature that connects your savings account to a fixed deposit account, allowing you to earn higher returns on the excess or idle money in your savings account. The auto sweep feature, as the name implies, “sweeps” excess funds from savings into a fixed deposit account. You must connect these two accounts and establish a monetary limit.
When the balance in your savings account exceeds this limit, the auto sweep feature kicks in. The amount over the limit is immediately transferred to the fixed deposit account. With this feature, the average interest rate on your idle money grows faster than the interest rate on your savings account.
How Does Auto Sweep Work?
A threshold limit is an amount you want to maintain in your savings account. Anytime your balance exceeds this threshold limit, the excess is deposited into your FD account – a procedure known as a ‘sweep-in’. Additionally, each of these accounts receives its interest earnings.
However, transferring funds into the FD does not result in losing the amount’s liquidity. When you request money from your account exceeding your threshold limit, the requested amount will be transferred from your FD account to your online savings account. This process is referred to as a ‘reverse-sweep’.
For example, assume you open a savings bank account with an auto sweep facility, where the minimum balance required is Rs.10,000. You have deposited Rs.40,000 and fixed a threshold limit of Rs.20,000. In this case, the excess amount of Rs.20,000 will now be transferred into your FD and both accounts will accrue interest based on their respective interest rates.
However, if you avail a reverse sweep of Rs.5,000, only the remaining Rs.15,000 in the FD will receive its rate of interest. Therefore, the bank advises against making frequent transactions using your account when an auto sweep facility is attached to it.
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Benefits of Auto Sweep Facility
1. Liquidity
The auto sweep facility enables one to have a lot of liquidity and ensures a good return on their funds. For instance, assume your current sweep account is getting low on funds, and you have an EMI or a cheque payment due. To ensure timely payment, your bank will automatically transfer the funds from the earlier invested amount to your current account, thus saving time and effort.
2. Flexibility
Banks often let you choose the FD’s duration, maturity period, and threshold amount. But most FDs come with a minimum holding period and early withdrawal could result in interest loss.
3. Linking Multiple Deposits
To ensure you never experience a liquidity crunch, you can link multiple deposits to the current account for fixed deposit sweep-in. Banks typically follow the “Last in First Out” principle in these circumstances, meaning that money will be transferred to your account from the most recent deposit linked with the sweep-in facility when a sweep-in is triggered.
4. Separate Corpus
The sweep-in FD facility helps you build a corpus that you can access in an emergency without liquidating any other assets and offers a higher interest rate.
Disadvantages of Auto Sweep Account
1. Penalties
Auto sweep accounts charge penalties for premature withdrawal of funds. Therefore, you cannot withdraw money from this account until maturity. Else, you must pay the penalty.
2. Carries Additional Fees.
You must pay additional charges to maintain and run your sweep accounts. Therefore, consider checking and understanding these extra charges before opening an auto-sweep account.
Terms Associated with Auto Sweep Account
1. FD Tenure
It is the term or the period for which the fixed deposit was created. As part of the auto sweep facility, most banks offer a 1-year deposit to their customers. However, some banks also offer fixed deposits with flexible tenure.
2. LIFO or FIFO
To maintain the specified minimum balance in your account with your day-to-day credits and debits, the bank may liquidate FD units using either the First In First Out (FIFO) method or the Last In First Out (LIFO) method. In the LIFO system, the bank will liquidate the FD units that you invested most recently (or last), and the amount will be deposited into your account. Under the FIFO system, the FD units that were created the earliest (or first) will be liquidated by the bank.
3. Premature-closure Penalty
This refers to the penalty for withdrawing money out of an FD before it has matured.
Banks with Auto Sweep Facility
- Bank of Maharashtra- Mixie Deposit Scheme
- Bank of India- BOI Savings Plus Scheme
- Kotak Bank Sweep in Bank Account
- ICICI- Money Multiplier Account
- Axis Bank- Encash 24
- Allahabad Bank- Flexi Fix Deposit
- HDFC Bank- Sweep in Facility
- Kotak Bank Sweep in Bank Account
- United Bank of India Bonanza Savings Scheme
- Oriental Bank of Commerce-Flexi Fixed Deposit Scheme
Tax Implications of on Auto Sweep Facility
The auto sweep feature also results in varied interest earnings, which has an impact on taxes. To ensure that interest has been paid correctly and that all auto sweeps are correctly accounted for, accounts must be reconciled. The bank statement can be complicated.
- Firstly, there is Interest on the Savings Bank account which is exempt till Rs.10,000 under section 80TTA.
- Next, we take fixed deposit interest income into account. Sweep-in account interest is subject to income tax according to the applicable tax slab. TDS at a rate of 10% is deducted from Fixed Deposit interest if it exceeds Rs.10,000 in a year. It is, however, to be noted that your income slab will determine how much interest you have to pay on the interest earned on fixed deposits. If your income is over Rs.10 lakh, you are subject to a 30% tax rate.
Differences Between an FD and Auto Sweep Account
Convenience is both the key benefit and the primary distinction between a regular and an auto-sweep FD.
Auto sweep FD option needs to only be selected once. After that, any surplus that exceeds the threshold limit in your account will be automatically converted into FD. As a result, you won’t miss out on the opportunity to receive higher returns and you won’t need to visit the bank each time you want to obtain an FD.
In contrast, in a regular FD, you have to make a request each time you want to convert your surplus to an FD. And for one reason or another, such as laziness, being overworked, or another, this thing is neglected, costing you the potential increase in interest and opportunity loss, thereof.
Final Word
Auto sweep facility is one of the best features to help maintain a healthy balance between your savings and investments. With this feature, you can be assured about the destiny of your surplus money without visiting the bank at regular intervals. The best use of this auto-sweep facility is when your savings account has stagnant excess deposits to avoid penalties for premature withdrawal.
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FAQs
Under this, the savings account is linked to a fixed deposit account via an auto sweep account, and a monetary limit is set. Anytime the amount balance in the savings account exceeds the specified limit, the excess funds are automatically transferred into the fixed deposit. By doing this, one can increase the interest rate on the money in your savings account over what it would have been earning in a standard savings account.
To maintain the specified balance in your account, the bank may liquidate FD units using either the FIFO (First In First Out) method or the LIFO (Last In First Out) method. In the LIFO system, the bank will liquidate the FD units in which you most recently invested, and the amount will be deposited into your account. Whereas under the FIFO system, the FD units that were created the earliest will be liquidated by the bank.
All banks usually offer auto-sweep, but these are generally account-specific. Hence one needs to confirm with your bank whether this option is available for your savings or current account or whether you can transfer to an account with a sweep-in facility. For instance, HDFC is a bank with auto sweep facility and the Super Saver account qualifies for the sweep-in feature; as a result, if you currently have a regular savings account, you must switch to the Super Saver account to take advantage of this feature.
The threshold limit is the amount above which the surplus is transferred to an FD, whereas the minimum account balance is the minimum amount that must be kept in your bank account. For instance, a bank account may require a minimum balance of Rs.5000 while the threshold amount can be set at Rs.35,000.
Yes, it can apply to both current and savings accounts. However, before choosing the Auto sweep facility, take into account the frequency of the withdrawals you will make from a current account. For more details, contact your bank.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
