Sweep Account- Hidden Secret to Earn Higher Interest On Your Saving

I opened my first sweep account in SBI.

Since then,  I am earning higher interest on my savings account.

How?

To know the secret, keep reading this article till the end.

What is Sweep Account

Sweep account or auto sweep is a facility that allows you to enjoy the combined benefits of a saving account and the fixed deposit on your saving account. In a sweep account, if your saving account balance exceeds the threshold limit, the excess amount automatically converts into the fixed deposit & you will earn the regular fixed deposit interest.

On the other side, if at any time balance falls short and need more money to complete the transaction, the fixed deposit automatically break down and transferred to the saving account.

How does Auto Sweep Account work

In auto sweep Firstly you have to define a threshold amount to the bank. The money up to that limit will remain in your savings account and you will earn regular savings account interest on that.

Anytime, the saving account balance across the ‘threshold limit’ the excess balance will automatically convert into a fixed deposit and you will earn a normal FD interest rate on that part of the money.

In case you need more money than your bank balance, the FD will automatically reversed-sweep into your savings account and your transaction will be processed.

This whole process is being performed automatically by the bank & you don’t have to do any manual work at the time of Sweep in or sweep out.

Let’s understand with an example –

Vijay has an auto sweep account with a threshold limit of Rs 25,000 and the interest on the savings bank account is 4%. On 1 June, he has Rs 20,000 in his account.

• As Rs 20,000  is less than the threshold limit of Rs 25,000, So it remains in the saving account and earns regular interest i.e 4%.
• On 10 June, he deposits Rs 45,000. The balance becomes Rs 65,000 in his account which is above the limit of Rs 25,000. So the Rs 40,000 (above threshold limit) will be put in Fixed Deposit. He will earn FD interest rate on that.
• On 15 June he withdraws 10,000 from his account. Balance in his account becomes Rs 15,000 and Fixed Deposit of Rs 40,000 remains intact.
• On 20 June he has to withdraw Rs 25,000 from his account. The balance in the Saving Bank account is Rs 15,000. It will break the FD for Rs 10000 and move the amount to Saving Bank.

This is how the sweep account works. Even in a sweep account, a person can have a number of fixed deposits. Every time balance crosses the threshold limit a new FD will be created.

You may also like to read PPF investment (everything you should know)

Effect of Sweep Account in My Saving Account (Sweep Account in SBI)

Look at account details of FD generated due to the auto sweep facility. You can clearly see that an interest rate is 6.75% which is 2.75% more than savings account interest rate ( 3.5% in SBI).

The default tenure of FD in SBI is 1 year. The tenure can be varied with different banks.

How Much Balance You Have in Your Saving Account

You see in my account details that due to sweep account I will earn higher interest on my unused saving balance. Now it’s your time to ask some questions from yourself.

How much money do you have in your savings account? 20,000? 50,000? or a few lacs? What portion of that money remains idle (always remains as it is in saving account) every month? Analyze your savings account.

If you have a lot of Idle cash in your savings account and you don’t want to invest in long term investment plans, then you must enable the Auto Sweep facility in your savings account. This will allow you to earn higher interest on your Idle money.

Human Psychology Behind Holding Excess Balance in Savings Account

The majority of people keep a huge balance in their savings account for the security purpose against an emergency that would arise anytime. Due to this money keeps in a saving account for long periods (months or even for years).

Question is, how often an emergency arises? Once in a month? Once in a year? Or never arise?

We all know this is uncertain. Then what is the purpose to keep money idle if you can maintain the same liquidity through sweep account with better returns? Think about it.

Special Note – Who keeps their entire savings at home really need personal finance guidance.

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Let’s Check the Interest Rate On the Saving Account

If you don’t know how much interest you earn on your saving bank, check here

• Kotak Mahindra Bank – 5%*
• Yes Bank  –  5%
• State Bank of India – 3.5%
• HDFC – 3.5%
• ICICI Bank – 3.5%
• Citi Bank – 3.5%
• Axis Bank – 3.5%
• Punjab National Bank – 3.5%
• OBC Bank – 3.5%
• Canara Bank – 3.5%
• Bank of Baroda – 3.5%
• Union Bank – 3.5%
• Allahabad Bank – 3.5%
• Bank of India – 3.5%
• IDBI – 4%

*Kotak Bank 5% interest Condition

You will earn 5% only over 1 lakh. Below that, you will earn 4% interest.

Sweep Account Interest Rate

The sweep account interest rate is the same as the fixed deposit interest rate for a specified period. We all know, every bank offers different interest rates for different tenure FD. Due to this reason, Sweep account interest is not the same for all the banks.

In short, the interest on the sweep account depends upon the bank and the tenure of your fixed deposit.

For better understanding, Look at the ICICI fixed deposit interest rates.

Investment period	FD rates for regular deposit	FD rates for Senior Citizens
7 days to 14 days	4.00%	4.50%
15 days to 29 days	4.25%	4.75%
30 days to 45 days	5.50%	6.00%
46 days to 60 days	5.75%	6.25%
61 days to 184 days	6.00%	6.50%
185 days to 289 days	6.25%	6.75%
290 days to 364 days	6.50%	7.00%
1 year to 2 years	6.75%	7.25%
2 years 1 day to 5 years	6.50%	7.00%
5 years 1 day to 10 years	6.50%	7.00%

You can clearly see below that fixed deposits are divided into tenure-based groups. The same interest rates are applied on the auto sweep out for a specified period.

How is the interest Calculated on Sweep Account?

Every FD generated due to auto sweep have a fixed tenure. This tenure can be fixed by default by the bank or you may also have the choice to decide it. This depends upon the bank’s rules.

If the FD completes its tenure, you will get full interest but in a case of premature withdrawal, you will get the interest as per the period for which the FD maintained. In premature withdrawal, you will also have to bear a penalty between 0.50% – 1% as interest cut down.

For example–

Suppose you have a fixed deposit of 1-year tenure. The interest rate for 1 year is 8%. Due to a balance shortage in saving the account, FD sweep-reversed into account after 6 months. In this case, the interest rate on 6 month FD is taken into consideration say it is 6.5%. Now penalty is taken out from the interest @ 0.50% – 1%. After all calculations, you will get the interest @ 5.5%- 6%.

Points To Note (Things that can Vary with Different Banks)

• Threshold limit – Some banks define the minimum threshold limit while the others allow you to decide the limit. For example, in SBI minimum limit is Rs 25,000.
• LIFO or FIFO – LIFO ( last in first out) and FIFO ( First in First out) are two different methods of FD liquidation. More often, the LIFO method is used by banks.
• FD Tenure – Like the threshold limit, some banks have fix tenure by default while others allow you to decide the tenure.
• Multiple sweep-FD – Some banks sweep-in the FD in multiple of Rs 1000 or Rs 5000 while others do it in multiple of Rs 1. HDFC bank does it in multiple of Rs 1.
• Premature-closure Penalty – A penalty ranging between 0.50% – 1%  is charged for premature withdrawal.

Auto Sweep Account Facility With Different Banks

Different banks provide auto sweep facility with different names. Check out here with your bank

• Kotak Mahindra Bank – Kotak Activmoney
• Yes Bank – Smart Saver Account
• State Bank of India – Multi Option Deposit Scheme
• HDFC – Sweep-in-Facility
• ICICI – Money Multiplier Account
• Axis Bank – Encash 24 Flexi Deposit
• Punjab National Bank – Prudent Sweep
• Oriental Bank of Commerce – Flexi Fixed Deposit
• Union Bank – Union Flexi Deposit
• Allahabad Bank – Flexi-fix Deposit
• Bank of India – Saving Plus Scheme
• IDBI – Sweep-in-saving Account

Disadvantages of Auto Sweep Account

The auto sweep account has some disadvantages also which you cannot neglect. These are –

• Pre-mature Penalty – The main disadvantage is the penalty charged on the premature withdrawal. As you read above, due to the penalty you may earn even less than saving bank interest.
• Additional fees – Some banks may charge extra fees for maintaining an auto sweep account, which can reduce the overall returns on the account.
• Low interest rates – Some banks are also known to give simple interest on the Auto-sweep Fixed Deposits. On FD you earn compound interest. Tenure of fixed deposit is set by the bank, Normally 1 year. But sometimes you may get higher interest on FD for odd Days like 1 year 3 days.
• Fully taxable – Unlike savings accounts, the interest earned on sweep-FD is fully taxable. There is no deduction under section 80TTA on interest earned from auto sweep FD.
• Complexity – The automatic transfers between accounts can make it difficult to track balances and transactions, especially if multiple sweeps are occurring at different times.

What Should You Do?

• It is only useful if you have a large bank balance left at the end of the month after expenses.  Also, you hardly will make any withdrawals from the FD.
• If you are still struggling to make ends meet and have hardly any money at the end of the month, this facility will not be useful for you.
• Check the bank’s deposit rates for the relevant period as well as the frequency of your withdrawals. Now deduct the bank’s penalty from the interest rate to understand the actual return.
• Get the maximum returns by avoiding withdrawing any money from the FD for a few months after their creation (At least 3-6 months).
• If you are a small saver, try to find a bank with lower threshold limits on the auto-sweep savings account. High thresholds will not work for you as a small saver.

FAQ

Q- Are Flexi Fixed Deposit & Auto Sweep Both Same?

Ans – Auto Sweep & Flexi Fixed Deposit are not the same but carry some same features also. In Flexi Fixed Deposit, you make a Fixed Deposit with the bank and link it to your savings bank account.

In case there are insufficient funds in your bank’s savings account to clear your withdrawal amount the deficit amount will automatically get transferred from your fixed deposit to your savings bank account. The 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 a fixed deposit.

Q- What is the Difference between Auto Sweep In & Auto Sweep Out?

Ans – The process when excess amount over the threshold limit moved as a fixed deposit is called sweep out. On the other hand, in a case of deficit balance, if funds moved from FD into the saving account is called sweep in.

Q- Does 80TTA deduction allowed on Sweep account?

Ans – Section 80TTA provides a deduction of Rs 10,000 on interest income on the savings account interest. Interest is earned on FD in a case of an auto sweep account. So 80TTA deduction is not allowed.

Q- Can FD interest be less than Saving account interest?

Ans – Suppose an FD was opened through the auto-sweep facility for 1 year @ 7% p.a. However, the FD had to be broken after just 20 days. You will get the interest applicable for a 20 day FD, which says 4.25%. If the bank charges a penalty of 1%, you will get only 3.25% which is less than saving account interest which is around 3.5% to 4%.

Conclusion

Now, after reading everything about the sweep account only, you can decide whether a sweep account will prove beneficial for you or not.

If the answer is yes, then select a threshold limit equal to your 2 months expenses so that you can avoid the sweep-out penalty. This will help you to maintain liquidity and earn more return on unused money.

Did you already know about the Auto sweep account? Do you think it will be helpful for you and do you plan to enable it? Let me your views in the comments.