For people who keep money in saving bank account one of the product suggested is Auto Sweep Bank 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. In this article we shall explain what is Auto Sweep Bank Account? How does Auto Sweep Bank account works? Which banks offer Auto Sweep account? How do the Auto Sweep account of different banks differ.
Table of Contents
Understanding Auto Sweep Account
What is Auto-Sweep Account ?
Auto Sweep is a facility which interlinks saving bank account with a Fixed Deposit account. In Auto Sweep account, amount in the bank above a limit is automatically transferred to Fixed deposits and earns a higher rate of interest. If balance of saving account becomes low and there is a need then Fixed Deposit will be broken and the amount will be moved back to Saving Account. Auto Sweep account provides the combined benefits of a Savings Bank account and Fixed Deposits.
Most of the Banks offer interest at the rate of 4% p.a. (some offer 6% – 7% interest on savings account). While Fixed Deposit for 1 year is around 8%.
Example of How Auto Sweep Account works
For example, Shyam has an auto sweep account with minimum balance of Rs. 5,000 threshold limit of Rs 40,000 and interest on saving bank account is 4%. On 1 May 2014 He has 30,000 Rs in his account.
- As he has 30,000 Rs which is less than limit of Rs 40,000 So it remains in saving account and earn regular interest i.e 4%.
- Suppose on 5-May-2014 he deposits a cheque of Rs 50,000. Now balance in his account is Rs 90,000 which is above limit of Rs 40,000. So 50,000 will be put in Fixed Deposit and remaining 40,000 will continue to remain in the bank account. So for Rs 50,00 he will earn higher interest as it is in FD. For Rs 40,000 in saving bank account he will continue to earn 4%.
- On 12-May-2014 he withdraws 20,000 from his account. Balance in his account becomes Rs 20,000 and Fixed Deposit of Rs 50,000 remains intact.
- On 17-May-2014 he drops in a cheque to withdraw Rs 25,000 from his account. Balance in Saving Bank account is Rs 20,000. But bank will not dishonour his request. It will break the FD for Rs 10000 and move the amount to Saving Bank. He is able to withdraw the amount he requested, Balance in his account becomes 5000. Amount in his FD becomes Rs 40,000.
- On 25-May-2104 he wants to withdraw Rs 5,000. Bank will again break the FD for Rs 5,000 and move this amount to Saving Bank. He is able to withdraw Rs 5,000. Amount in FD becomes 40,000. Amount in Saving Bank account is Rs 5000.
- On 27-May-2014 he deposits Rs 50,000. So balance in Saving bank account becomes Rs 55,000. As this is above the threshold limit of Rs 40,000 and minimum balance of Rs 5,000 another FD is made for Rs 10,000.
Terms associated with Auto Sweep Account
Some typical terms associated with Auto Sweep Account are as follows:
- Threshold Limit : Amount above which the surplus money in the saving bank account is converted into Fixed Deposit. Note this amount is different from the minimum balance that banks define for a savings account.
- Sweep OUT : when the money above a threshold automatically moves to an FD. Sometimes just called as Sweep,
- Sweep IN : when the money from an FD is moved IN to the savings account to honour withdrawals. Sometimes it is also called as Reverse Sweep. The funds to be transferred as a reverse sweep to Savings Bank/Current Account will also meet the requirement of maintaining minimum balance. Usually only the principal amount of the Term Deposit is considered for the Sweep-In facility.
- Tenor or Period of the FD: Time for which FD is opened Some banks offer only 1 year deposits as part of auto sweep facility. Some banks do offer flexible maturity periods of deposit .
- LIFO or FIFO: These are methods adopted by banks while breaking FDs . In LIFO last in first out method the linked FD units created most recently will be closed first for transfer to the Saving Bank Account. In FIFO (first in first out) the first FD created will be broken first. It is preferable to have LIFO.
- Pre closure penalty: Penalty for breaking the Fixed Deposit before it’s full tenor.
How does SWEEP IN and OUT show up in bank statements
Every time, your FD gets broken, there usually two transactions in your statement.
- How much of your FD was broken (and deposited in your savings)
- How much interest was earned?
31 Dec 2013—SWEEPIN CR-00004*******16———5000.00
31 Dec 2013—INT. ON SWCR ON-00004*******16–90.00
When FD is broken in AutoSweep Account
Autosweep savings accounts may be convenient since excess money from these automatically moves to a fixed deposit (FD). Under the autosweep facility, when your savings account balance exceeds a certain limit, the excess money is put into an FD. The threshold can be anywhere between Rs.25,000 and Rs.1 lakh. The FD would have a minimum maturity period as decided by the bank.If the savings account balance is used up when withdrawing money, the bank will dip into the FD to make up for the shortfall. For instance, at Axis Bank Ltd, if the balance falls below Rs.25,000 in autosweep savings account, the FD is tapped to give you the withdrawal amount.
But frequent withdrawals from the FD means loss of interest. Every bank autosweeps in FDs with a certain maturity limit, say one year. If the investor liquidates the FD prematurely, you may lose even the nominal interest you would have otherwise earned on the same deposits
- the interest is calculated based on the number of days the FD was with the bank. This means that if the FD’s tenor was a year, but money was withdrawn from it within, say, 25 days, then the interest applicable for 25 days only would be considered.
- bank deducts some penalty from the interest or seizes the interest totally. Premature withdrawal penalty—usually 0.5-1% of interest payable—reduces returns. If your 25 days FD interest rate was 3.5%, postpenalty, you may get only 2.5%.
So, the total interest earned would ultimately be much lower than if you had kept the money in just the savings account, as shown in the image below.
Check the frequency of your withdrawals and the bank’s deposit rates for the relevant period. Subtract the penalty from the interest rate to find out whether the facility is useful. To maximise returns, refrain from dipping into the FDs for a few months from the time they are created. “One should leave the FDs for a tenure of at least 3-6 months in an autosweep facility to avoid deposit termination charges for premature closure and lose interest
Tax and Auto Sweep Account
Interest income from Fixed Deposit
The autosweep feature also means different interests earned, which matters for taxation. So one needs to reconcile accounts to be sure that interests have been paid correctly and all autosweeps are rightly accounted for. The bank account statement can be complicated
- There is Interest on Saving Bank account. While interest in Saving Bank account is exempt till Rs 10,000 under section 80TTA. Our article Saving Bank Account:Do you know how interest is calculated and more explains interest on Saving Bank Account in Detail. Our article Interest on Saving Bank Account : Tax, 80TTA explains 80TTA in detail.
- Interest income from Fixed Deposits The interest income from sweep in accounts is taxable as per income tax slab. The normal tax rules apply. If interest earned from Fixed Deposit in a year is more than 10,000 Rs, TDS at the rate of 10% is deducted.But remember that tax on Interest Earned on Fixed Deposit will be on basis of your income slab. If you have income of above 10 lakh you fall in 30% tax bracket. Our article Fixed Deposits and Tax explains Fixed Deposit in detail.
If you are considering autosweep as an investment tool, do the math first to understand the real returns. Even if you were to leave the autosweep as it is and earn 8% per annum on a one-year FD, the real return would be 3%, assuming an inflation of 5% per annum. Post-tax, this return would be 2% for those in the highest tax bracket.
How much more do you earn from Auto Sweep in?
Let take a simple case where in you have parked Rs 25,000 in a normal savings account with 4% interest. Formula for calculating Daily interest is = Amount (Daily balance) * Interest (4) / days in the year.
|Normal Savings Account|
|Amount||Rate Of Interest||Maturity Amount||Interest Earned|
But suppose instead of doing this, you were to break this Rs 25,000 into 5 sweep ins each of Rs 5,000 which earn different rates of interest for a year. The following shows the returns in this case.
|Auto Sweep Accounts|
|Amount||Rate of Interest||Maturity Amount||Interest Earned|
But remember that tax on Interest Earned on Fixed Deposit will be on basis of your income slab. If you have income of above 10 lakh you fall in 30% tax bracket.
While interest in Saving Bank account is exempt till Rs 10,000 under section 80TTA.
So in above example interest of Rs 1000 is tax free but for a person in 30% tax bracket will have to pay appro Rs 450 as tax (.03 % of 1652)
Net Difference = 1652-450-1000 = 252 Rs even after tax deduction.
Banks and Auto Sweep Accounts
There are variations in the Auto sweep facility offered by banks on the name of Auto Sweep facility, setting of threshold limit, making of Fixed Deposit(automatic/manual),tenure of Fixed Deposit, breaking of Fixed Deposit. Let’s see the variations in the auto sweep facility offered by banks.
- Name of the Auto Sweep Facility :different banks have different names for this facility. For eg., ICICI Bank calls it ”Auto Sweep” , HDFC Bank calls it “Sweep-In” account , and SBI calls it Multi Option Deposit Scheme.
- Tenor or Period of the FD: Some banks offer only 1 year deposits as part of auto sweep facility. Some banks do offer flexible maturity periods of deposit . For example for Oriental Bank Flexi Fixed Deposit Scheme FD is accepted for a period of 90 days to five years in flexi saving accounts and for 45 to 1 year in flexi current accounts. By default, it is 90 days in flexi Saving accounts and 45 days in flexi Current accounts..
- Method of liquidation: The method of liquidation adopted by banks while breaking multiple FDs is different. Some banks offer LIFO (last in first out) while some offer FIFO (first in first out). In LIFO method where the linked FD units created most recently will be closed first for transfer to the Saving Bank Account. In FIFO (first in first out) the first FD created will be broken first. It is preferable to have LIFO.
- Pre closure penalty: Some banks charge pre closure penalty on breaking FDs before time. For example in case of Encash 24 of Axis Bank interest rateis 1.00% below the card rate, prevailing as on the date of deposit, as applicable for the period the deposit has remained with the bank or 1.00% below the contracted rate, whichever is lower. However, for Rupee Term Deposits closed within 14 days from the date of booking of the deposit interest rate shall be rate applicable for the period the deposit has remained with the bank or the contracted rate, whichever is lower. In Case of HDFC Bank If the Fixed Deposit is held for less than 7 days, interest for the amount transferred is forfeited.
- Type of Interest: Some banks offer simple interest on the sweep in accounts as against cumulative that is available on fixed deposits.
- Auto Sweep Out Unit: Multiples by which FD will get made : Some banks make FD in multiple of 5000 some in 1000s.
- Auto Sweep In Unit: Multiples by which FD will get broken : Some banks break FD in multiple of 1000 some to nearest rupee. For example in State Bank of India Mutli Option Deposit scheme FD is broken in units of Rs. 1,000 . While in HDFC Bank Deposits are broken down in units of Rs 1 thereby minimising Interest Loss
Banks with Auto-Sweep facility
- Axis Bank – Encash 24
- Union Bank – Union Flexi Deposit
- HDFC Bank – Sweep In Facility
- Bank of India – BOI Savings Plus Scheme
- Oriental Bank of Commerce – Flexi Fixed Deposit Scheme
- State Bank of India – Multi Option Deposit Scheme
- Allahabad Bank – Flexi-fix Deposit
- Kotak Bank Sweep in Bank account
- ICICI – Money Multiplier Account
- Bank of Maharashtra – Mixie Deposit Scheme
- United Bank of India Bonanza Saving Scheme
Is Auto Sweep facility same as Flexi Fixed Deposit?
No Auto Sweep facility is similar but not same as Flexi Fixed Deposit. In Flexi Fixed Deposit, you make a Fixed Deposit with the bank and link it to your saving bank account. In case there is insufficient fund in your saving Bank account to clear your withdrawal amount the deficit amount will automatically get transferred from your fixed deposit to your savings bank account. So entire FD is not broken but only part of FD is broken. In a sweep in facility, any amount above a threshold limit automatically gets converted into fixed deposit
Disadvantages of Auto-Sweep Account
Auto-Sweep has some disadvantages too.Before opening the auto sweep facility, please understand.
- In general the interest rates of normal fixed deposit and FDs under Auto-Sweep are same, but some banks charge a penalty if the FD under auto-sweep accounts are broken before some duration like 1 yr and 1 day .
- Some banks are also known to give simple interest on the Auto-sweep Fixed Deposits and not compound interest as in case of normal fixed deposits .
- When you have multiple FDs created, the order of breaking the FDs might affect the returns.
- Interest earned on FD is taxable
- Interest on Saving Bank Account : Tax, 80TTA
- Saving Bank Account:Do you know how interest is calculated and more
- Fixed Deposits and Tax
- Alternatives to Fixed Deposits: PPF,FMP,Debt MF,RD,CD
- Premature withdrawal or Breaking of Fixed Deposit
While Auto-sweep is a wonderful thing for people who want to maintain liquidity, as well as want to earn more interest on their unused money, one should understand the Auto Sweep facility. If you are very sure that the money lying in your account will really not be used for long, better to use the normal Fixed deposit or Debt funds. Do you use Auto Sweep facility? Do you recommend others to use it? How do you save money for emergency?