Many of us keep a significant portion of our savings in a standard savings bank account, earning a modest annual interest of typically 2.5%. However, a smarter approach to managing your funds involves a "sweep-in" facility offered by banks. This innovative feature allows your excess savings to automatically move into a fixed deposit (FD) account, where it can earn a higher interest rate, often 6% or more.
What is a sweep-in facility?
A sweep-in facility links your savings or current account to a fixed deposit. When the balance in your savings account exceeds a predefined threshold, the surplus amount is automatically "swept" into an FD, where it starts earning a better interest rate. Sweep-in FDs also come with the "reverse sweep" feature. If your savings account balance dips below a certain minimum amount due to a transaction or purchase, the bank automatically transfers the deficit amount from your linked FD back to your savings account.
This ensures you have access to funds for emergencies like medical bills or vehicle purchases without manually breaking your FD and without affecting the interest rate on the remaining FD balance.
For instance, some FDs allow customers to access funds like a savings account while benefiting from attractive FD interest rates. When a reverse sweep occurs, funds are typically transferred on a Last-In-First-Out (LIFO) basis, often in multiples of Rs 5,000.
Sweep-in facilities are available for various entities, including resident individuals, societies and trusts, private and public limited companies, and Hindu Undivided Families (HUFs). While enjoying the benefits of an FD's higher interest, you still need to maintain the average balance applicable to your savings or current account.
Advantages of sweep-in accounts
The primary advantage of a sweep-in account is that it offers the best of both worlds -- the high liquidity of a savings or current account combined with the attractive interest rates of a fixed deposit. This means your money is never idle; surplus funds automatically earn more.
Additionally, many sweep-in FDs come with hassle-free auto-renewal, meaning the principal and accrued interest are automatically renewed for the same tenure, ensuring continuous growth.
Disadvantages of sweep-in accounts
Despite their benefits, sweep-in accounts do have some potential drawbacks. Banks may impose additional fees for availing this facility. Penalties might be applicable for premature withdrawal of funds from the FD component. Therefore, it's advisable not to withdraw funds before the maturity of a sweep cycle to avoid these penalties.
Before opting for a sweep-in FD, it's crucial to consider factors such as the minimum balance requirement, interest rates and tenure options, auto-renewal and premature withdrawal charges, sweep-in thresholds, sweep-out frequencies, and any tax implications on the interest earned. Understanding these aspects will help align the sweep-in FD with your financial goals and spending habits.
Tax implications
Interest earned from savings accounts up to Rs 10,000 a year is exempt from taxes. However, any interest income above Rs 10,000, the amount is taxable as per the income tax slab. For senior citizens, interest income up to Rs 50,000 is exempt from tax.
Any interest earned from a fixed deposit is taxable as per the income tax slab.