What Is Auto Sweep Bank Account: Banking facilities in modern times have seen an enormous number of developments. Today, we can operate our bank accounts simply sitting at home or anywhere in the world. All these developments in the banking systems have opened a lot of risk-free investment opportunities for the public, such as Fixed deposits, Recurring Deposits, Savings account deposits, etc. But, these deposits yield a lesser interest as compared to that of stocks, debentures, etc. People must be aware that money kept idle in a savings account never grows, and it hardly earns an interest of 4% on average.
Today, people search for the best and risk-free investment opportunity to earn them a lot of profit in less time. In search of such opportunities, they often turn to more complicated investments and ignore the simple and easy ones. Auto Sweep Bank facility is one such easy and simple investment activity provided by banks that converts your savings bank deposits into fixed deposits, thus generating a more significant percentage of interest.
Auto Sweep bank facility is most recommended for people who want to earn more interest on their savings bank deposits. With the Auto Sweep facility, one can have the ease of withdrawing money combined with a higher rate of interest on fixed deposits linked with the savings account.
This article will discuss the Auto Sweep Bank Account, how does an Auto Sweep bank facility works, and other terms related to Auto Sweep Bank Accounts.
Basics of Auto Sweep Account
Auto Sweep Bank account can be defined as a combination of a Savings account and a Fixed Deposit account. When one opts for an auto sweep facility, the bank links the savings account of that person to a fixed deposit account. In the process of auto sweep facility, the amount above a certain limit in the savings account is automatically transferred into a fixed deposit account, earning a greater rate of interest. Being a combination of a savings account and a fixed deposit, auto sweep facilitates both withdrawal and investment of a person’s fund simultaneously.
With the Auto Sweep facility, when the balance in the savings account becomes low, the fixed deposit thus created would be broken down to move the amount into the savings account. While savings account yield an interest of 4%, fixed deposits earn up to 8% interest per annum, and with a sweep facility, a person can enjoy the benefits of both.
Working of Auto Sweep Bank Account
When a person opts for an auto sweep account facility, he/she is offered to choose a limit of the amount which he/she wants to be held in his/her savings account. Thus, the limit chosen is called the threshold limit, and any money above the threshold limit is transferred to the fixed deposit account. The banking term for the transfer is “sweep out.” In an Auto Sweep account, both the deposits earn interests differently.
The key advantage of a sweep account is that the money never loses its liquidity, i.e., it can be withdrawn at any time without losing the interest on the fixed deposit of the auto sweep. The money withdrawn in an auto sweep facility is from the threshold limit and not from the fixed part. Let us take some examples to help you understand better.
Let’s take the example of Raghu, who has an auto sweep account with a minimum balance of ₹3,000 and a threshold limit of ₹30,000. The interest on his savings bank account is 4%, and on 1st June, he has ₹22,000 in his savings account.
Now, the points mentioned below are to be considered:
- On 1st June, as it is seen, Raghu has a balance of ₹22,000 in his account. So, this amount will remain on his savings account, earning him 4% interest as the amount is below the threshold limit.
- On 10th June, Raghu deposits another ₹20,000 in his account. Now, his total balance is ₹42,000, which is more than the threshold limit. The excess amount, which is ₹12,000, will be transferred to a fixed deposit, and the remaining ₹30,000 will continue to be in the savings account.
- On 14th June, Raghu withdraws ₹10,000 from his savings account. The withdrawal won’t affect his fixed deposit amount.
- On 16th June, Raghu draws a cheque of ₹30,000, but his savings account balance is ₹20,000. In such a case, the bank won’t dishonour the bill, but it will break the FD and deposit the money back into the savings account.
So from the above example, it can be seen how an Auto Sweep account works.
Terms Related To Auto Sweep Account
In earlier paragraphs, we discussed the basics and working of an auto sweep account. Now, let’s understand some of the basic terms related to auto sweep account.
- Threshold Limit: The threshold limit is the amount set by a person opting for a sweep account. It is the amount to be held in the savings bank account, and the bank will transfer any amount exceeding the threshold limit to the fixed deposit.
- Sweep Out: Sweep out is the most common term used in a sweep account. It signifies the transfer of money above the threshold limit to the fixed deposit. In banking terms, it is also called a Sweep.
- Sweep In: When money from the fixed deposits is transferred to the savings account to facilitate withdrawals, it is termed Sweep In. It is also called a reverse sweep, as it is a reverse transfer of money from FD to savings.
- The tenor of Fixed Deposit: The period or tenor of the deposit varies from bank to bank. Some banks allow only one year of fixed deposit in an auto sweep facility, while others allow a flexible maturity period.
- LIFO and FIFO: These are the standard methods adopted by banks while breaking FDs in Auto Sweep accounts. LIFO means Last In First Out, and in this method, the most recently created FDs are broken first to be transferred to the savings account. In contrast, FIFO means First In First Out, and under this method, the first created FD is broken and transferred to the savings account.
Breaking FD In Auto Sweep Bank Account
Auto Sweep accounts may seem convenient as it utilizes the excess money lying idle in the savings banks account thus earning a higher interest rate. In auto sweep accounts, when money is deposited in excess of the threshold limit in a savings banks account, it is automatically transferred into a fixed deposit account. The threshold limit in a bank can be anywhere between ₹25,000 to ₹1,00,000. However, it differs from bank to bank and also depends on the customer.
The FD thus created under the auto sweep account will have a minimum maturity period. But, when the savings bank account falls short due to withdrawals, the amount from the FD is broken and transferred into the savings account. However, it should be noted by the customer that frequent withdrawals from the FD might lead to a loss of profits or interests. Here are the points banks consider while calculating interest on FD in auto sweep:
- The interest on FD in an auto sweep account is calculated based on the number of days the FD was in the bank. For example, an FD has one year period for maturity, but it is liquidated with 24 days, then the interest would be calculated for 24 days.
- Banks apply a penalty on premature FD withdrawals. The penalty is between 0.5-1% of the total interest.
Tax On Auto Sweep Account Interest
Interest earned on bank deposits is taxable under the Income-tax act. In auto sweep accounts, there are different rates of interest for both accounts that create complications during tax filing.
In an auto sweep account, the interest earned under a savings account is exempted up to ₹10,000 under section 80TTA of the income tax act. In contrast, interest earned on fixed deposits is taxable as per the income tax slabs. In addition, if the interest earned on a fixed deposit exceed ₹10,000 in a year, then a TDS rate of 10% is applicable on the total interest amount.
Demerits of Auto Sweep Bank Account
Like every coin has two sides similarly, auto sweep accounts also have certain disadvantages with all the advantages. Here, we have listed some of the disadvantages of an Auto sweep account:
- Most of the time, the interest rates of regular Fixed deposit and auto sweep fixed deposit is equal. But, banks charge a penalty rate on the fixed deposit of auto sweep account in case of premature liquidity of the deposits.
- In some cases, banks adopt a simple interest method on the fixed deposits in an auto sweep account. In contrast, the compound rate is charged on regular fixed deposits.
- When a person creates multiple FDs under an auto sweep account, his/her rate of return might be affected due to the order of breaking of the FDs.
- Interest earned on FDs in auto sweep account is taxable as per the income tax slabs.