Do you have a bank account?
If your answer is yes, then this article is for you. In general, individuals have a saving bank account wherein you have the flexibility to deposit and withdraw funds at your convenience and you also earn interest at the rate of approx. 4%.
In this article you will learn how you can earn more from your existing bank account.
How do I earn more interest from my existing bank account?
If you want to make the most out of funds lying in your bank then you don’t need extensive financial knowledge. We’ll tell you all about a new, more convenient and simple way to earn more interest, with Auto-Sweep FD.
What is Auto-Sweep FD?
In Auto-Sweep FD, just like normal Fixed Deposit account, your funds earn a higher rate of interest which is generally 7-8%. Here, the surplus funds in your savings account which are over the threshold limit are converted into a normal FD, but can be withdrawn anytime at your convenience. Whenever you need more funds than what is actually available in your saving account then the surplus which was converted into FD is tapped in to get the required balance.
What is the difference between normal FD and Auto- Sweep FD?
The main benefit and the key difference between the two is convenience.
You have to opt for Auto- Sweep FD facility only once. Once selected whenever there’s a surplus in your account over the threshold limit, it’ll get converted into FD automatically. Therefore, you won’t lose out on the chance of earning higher returns and also won’t have to check in with the bank every time you want to get a FD.
Whereas in normal FD you have to every time raise a request to convert your surplus into a FD. And due to some reason or the other likes laziness/ being busy/ other reason – this thing gets left out as a result of which you lose the additional interest which you could have earned.
How does Auto- Sweep facility work for me?
Auto-Sweep FD mainly offers two benefits-
- Higher Interest
- Withdrawal Flexibility
For instance, let’s suppose you have a fixed source of income, say a salary of Rs. 50000 deposited in your account every month. So, normally in a savings account you’d earn approximately 50000*4% = 2000 as your interest.
But if you have an auto sweep facility, and there’s a threshold of say Rs. 30000, so any amount over it will be converted into FD. In this case, Rs. 20000 will be converted into FD. So roughly you’ll earn 20000*8%= 1600 (FD Interest) and 30000*4%=1200 (Savings Interest), which in total becomes, 1600+1200=2800 as your interest earning, an extra Rs.800!
|Comparison Chart||Saving Account|
|Auto- Sweep Facility enabled account|
|Extra Interest Earned||2800- 2000= 800|
If at any time you want to withdraw more than the funds lying in your savings account, say, you want to withdraw Rs. 40000. The bank will use the Rs. 30000 lying in your saving account and the balance Rs. 10000 will be taken from your auto-sweep FD account, thereby, not compromising on your convenience of withdrawal of funds.
Also, you’ll keep earning the 8% interest on your balance fund of Rs. 10000 in your FD account. The 10000 withdrawn from your FD account will also earn interest based on your applicable FD rates, calculated basis the number of days it was in your FD account.
Here’s a glimpse of what your statement would look like with a saving account with Sweep-In Facility:
Assumption: Threshold Rs. 30,000
|Date||Transaction||Savings Account (Rs.)||Auto-Sweep FD (Rs.)||Remarks|
|1-11||Opening Balance: Rs. 20,000||20,000||–|
|10000||40000||The amount is split between Auto Sweep FD and Savings. Amount above the threshold has been transferred to FD|
|(15000)||–||The withdrawal is made from saving account since it has sufficient funds to meet the requirement|
|(15000)||(10000)||Since the amount required i.e. Rs. 25000 is more than the available balance in the saving account i.e. Rs. 15000, FD was broken to get the balance Rs.10000.|
|30000||20000||The entire amount above the threshold limit has been automatically transferred to create a new FD.|
What are the tax implications of Auto- Sweep Facility?
Just like a regular FD, the interest earned here is also tax deductible. Wherein the bank deducts a 10% TDS from your interest earned. This interest earned is shown in the ITR return just like your saving account interest. The only difference is that in case of Interest on Savings Account, you get a deduction of Rs.10000 and the excess is taxable at slab rate. Whereas in FD the entire interest is taxable at the applicable slab rate, although TDS is deducted on the same only if the interest is above Rs. 10000. But even then you end up earning more with Auto-Sweep FD.
Are there any disadvantages of Auto- Sweep FD?
Just like every plan has its pros and cons, even this has.
It is only beneficial to opt for auto sweep facility if you are certain that you’ll have surplus lying in your account for at least more than 30 days. If you make frequent withdrawals, and you might need to withdraw from your FD before 30 days, then it may not be beneficial for you. As the interest earned on amount deposited for less than 30 days is less than 4% (after tax), which makes it a negative affair. Also, there is a penalty on early withdrawal of funds, which can vary from 0.5- 1% depending on the bank. Although some banks don’t charge premature closure penalties for auto sweep accounts.
Is there anything else that I should know about Auto- Sweep FD?
Some general information and FAQs related to it.
- What are LIFO and FIFO in Auto- Sweep FD?
In auto- sweep FD every time your balance crosses the threshold, a new FD is created, thereby, resulting in creation of multiple FDs. When you have a shortage of funds in your saving account, these FDs are broken in the order of either LIFO or FIFO. Under LIFO, the most recent FD is broken to meet your fund requirement, which is actually considered better since the first created FD is intact and keeps earning interest. Whereas in case of FIFO, the first created FD is broken to meet the shortage of fund.
- What is the threshold limit for Auto- Sweep FD?
The threshold limit may or may not be predefined by the bank. If you are a small saver choose a bank with lower threshold limit.
- Does my bank have auto- sweep FD facility?
Usually all the banks have auto-sweep in facility but these are generally account specific. So, you have to check in with your bank whether your saving/current account comes with this option or you can transfer to the account with sweep-in facility. For instance, in HDFC the Super Saver account is eligible for Sweep-in facility; hence if you’re a regular savings account holder, you’ll have to switch to the Super Saver account to avail this facility.
- How are the FDs created in Auto- Sweep FD?
The FDs are created in multiples of a sum, depending on the bank, and are subject to a minimum amount. For instance, in HDFC, FD is created for a minimum amount of Rs. 25000 in the multiples of 1000. So if the amount in your account above threshold is Rs. 24000, no FD will be created.
- What is the difference between minimum account balance and threshold limit?
The minimum account balance is the minimum amount required to be maintained in your bank account whereas the threshold limit is the amount above which the surplus is transferred to FD. The funds to be transferred as a reverse sweep to account will also meet the requirement of maintaining minimum balance. For instance, a bank account may have minimum balance as Rs. 5000, and the threshold amount can be Rs. 35000.
- I have a current account. Can I opt for Auto- Sweep Facility?
Yes, it is applicable for both saving and current account. Although the frequency of withdrawals in current account must be accounted for before opting for Auto- Sweep In facility. Contact your bank for more information.
|The amount above which the surplus money in the saving bank account is converted into Fixed Deposit. It is different from the minimum balance that banks define for a savings account.|
|Sweep OUT:||The automatic transfer of money to an FD account is called Sweep Out, sometimes just called as Sweep.|
|Sweep IN:||When the money from an FD is moved IN to the savings account to meet the excess withdrawal requirements. Sometimes it is also called as Reverse Sweep. Usually only the principal amount of the Term Deposit is considered for the Sweep-In facility.|
|Duration of Auto-Sweep FD:|| The duration for which FD is created. Some banks offer only 1 year deposits as part of auto sweep facility. Some banks also offer flexible maturity periods.|
|Pre-closure penalty:||Penalty for breaking the Fixed Deposit before its full tenure.|
Auto- Sweep facility in different banks:
Auto- Sweep facility has different names, where each bank has its own nomenclature for the same. Here are some of the names of Auto- Sweep FD named by various banks:-
Should I opt for Auto- Sweep FD facility?
In our opinion, you should opt for this facility in order to earn more from your existing funds lying in your bank account. It’s an easy and smart choice. You can conveniently earn higher interest without losing on the flexibility of withdrawals.