Sweep account, also known as an auto sweep account, is a type of bank account that can be linked to both a savings and FD (Fixed Deposit) account. However, it is important to note that the sweep-in of funds from FD to savings account is triggered on a Last in First out basis (LIFO).
With auto sweep, any surplus balance in your savings account that exceeds the predetermined threshold is automatically converted into a fixed deposit, allowing you to earn a higher interest rate on the excess funds.
Conversely, if your savings account balance falls below a certain level and you need additional funds for a transaction, the fixed deposit is automatically broken down and transferred back into your savings account.
This ensures that you always have access to the funds you need, without having to worry about maintaining a minimum balance or losing out on potential interest earnings.
Many banks in India offer sweep accounts, including popular institutions like State Bank of India, HDFC Bank, ICICI Bank, and Axis Bank.
How Does Auto Sweep Account Work?
When you open an auto sweep account, you set a threshold limit for your savings account balance.
If your balance exceeds this limit, the excess amount is automatically transferred to your FD account. This process is known as “sweep-in”.
Once the money is in your FD account, it starts earning interest at the prevailing FD rate. The FD account is typically set up for a predetermined period of time, which can range from a few days to years, depending on your bank.
If the balance in your savings account falls below the threshold limit, the bank will automatically transfer the required amount from your FD account back into your savings account. This process is known as “sweep-reverse”.
Let’s take the example of the SBI ‘Savings Plus’ account, which is linked to the SBI Multi Option Deposit Scheme (MODS) account. The minimum threshold limit for this account is Rs. 35,000, which means that only the excess funds above this amount will be transferred to the MODS account.
However, note that the MODS account has a separate minimum deposit size of Rs. 10,000, and in multiples of Rs. 1,000 thereafter.
This means that the auto-sweep feature will only be triggered once the idle funds in your savings account cross Rs. 35,000. The excess amount will start earning interest at the prevailing FD rate.
If you need to withdraw funds from your account, the bank will automatically transfer money from your FD account back into your savings account, ensuring that you have the required funds to complete the transaction.
Interest Calculated on Sweep Account
When you set up auto sweep, every fixed deposit generated has a specific tenure. This tenure can be either fixed by the bank by default or you may have the option to decide it, depending on the bank’s rules.
If the FD completes its tenure, you will receive the full interest earned. However, in case of premature withdrawal, you will only receive the interest as per the period for which the FD was maintained, and you will also have to bear a penalty of 0.50% to 1% as a reduction in interest.
You can also read how to calculate bank interest rates with formula.
Disadvantages of Auto Sweep Account
#1. Lower Interest Rates Compared to FD Accounts
Banks offer a simple interest rate on Auto-sweep Fixed Deposits, unlike the compound interest rate on regular fixed deposits. You can also get higher interest on FD for odd Days like 1 year 1 day.
As a result, you may earn less interest on the funds in an auto sweep account than you would through a regular fixed deposit.
It is important to compare the interest rates of different types of accounts offered by the bank before opening an auto sweep account.
#2. Premature Withdrawal Penalty
Auto sweep accounts charge a penalty for withdrawing funds before the fixed deposit (FD) tenure is completed. As mentioned earlier, this penalty can result in earning less than the interest offered on a savings account.
In case of premature withdrawal, the interest received will only be for the period for which the FD was maintained, and a penalty ranging from 0.50% to 1% of the interest earned will be charged.
#3. Charge Additional Fees
Some banks may charge additional fees for setting up and maintaining an auto sweep account. You can consider these extra charges before opening an auto-sweep account.
#4. Taxable
The interest earned on the fixed deposit generated through an auto sweep account is fully taxable. There is no deduction under section 80TTA .
This means that the returns you earn from the account will be subject to income tax, which can further reduce your overall returns.
#5. Complexity in Sweep-Account
Auto sweep accounts can be more complex to understand and manage compared to regular savings accounts or fixed deposits.
You need to keep track of the minimum balance requirements, the threshold limit, and the maturity dates of the fixed deposits to maximize the benefits of the feature.
Disadvantages of Auto Sweep Facility in SBI
The State Bank of India (SBI) is one of the largest banks in India, and it offers an auto sweep facility for its customers. However, there is a disadvantages of auto sweep facility in SBI that you should be aware of.
One of the main drawbacks is that SBI’s auto sweep facility offers lower interest rates compared to other banks.
For example, as of April 2023, the FD interest rate on SBI’s auto sweep account is 6.80% for 15 months, while the interest rate on a savings account is 2.70%.
In comparison, HDFC’s auto sweep account offers a higher FD interest rate of 7.10% for 15 months and 3% interest on savings accounts.
Overall, HDFC offers a higher interest rate on the fixed deposit generated through the auto sweep facility as compared to SBI. Also, the savings account interest rate offered by HDFC is also slightly higher than that of SBI.
Final View
Auto sweep can be a convenient feature, it’s important to understand the terms and conditions of your account and any associated fees and charges before signing up.
Additionally, the interest rates offered on auto sweep accounts can vary between banks, so it’s important to compare rates and choose an account that offers the best returns for your savings.
