Many of us keep balances in our savings and current account with Banks for various reasons. While some of us keep the money in a savings account for mundane transactions, others keep money to meet contingencies. A business entity like a partnership firm or a company may keep huge amounts in a current account to meet many expenses related to their business.
In all these cases, funds are lying idle. These idle amounts will earn SB rate of interest in a savings account and zero interest in a current account. You are indifferent to the returns that these balances can earn. You are lazy to move the money around and make it work for you. Wouldn’t it be nice if the bank provided a facility which gave a FD return on your balances without compromising on liquidity of savings account? The auto sweep facility, which “sweeps” excess money from your savings account to a fixed deposit, is the answer. Here is a lowdown on the auto sweep facility.
Automatic sweep facility
Most of the banks are offering the auto sweep facility to the savings and current account holders. However, you do not get this facility by default. You will have to opt for it. Moreover, if you opt for it there may be certain conditions like the threshold limit, the minimum amount per unit/deposit, tenure and reverse sweep facility.
What is threshold limit?
A cursory look at the table tells you that different Banks have different threshold limits for the Auto sweep facility. SBI’s Savings Plus account has the highest threshold limit of Rs 35,000.
Axis Bank’s Encash 24 Flexi deposit has a threshold limit of Rs 25,000 for transfer to a fixed deposit. Mind you, the minimum balance in the account is not the same as threshold limit.
Any amount in excess of the threshold limit will be swept in to a Fixed Deposit in multiples of Rs 5000. So if you have a balance of Rs 92000 in Axis Bank Encash 24, you will have a FD of Rs 65,000 (broken in to 13 chunks of FDs Rs 5,000 each) and a balance of Rs 27,000 in SB (which is above the threshold limit of Rs 25,000).
In respect of auto sweep in, SBI has the smallest auto sweep in unit of Rs 1000 whereas Yes Bank has the highest Auto sweep in Unit of Rs 10,000.
Tenure of deposit The next question you may ask will be on the tenure of the fixed deposits. Do you have the flexibility to choose the tenure of the deposit? While Axis Encash 24 gives you the option to choose the tenure from 6 months to 5 years, whereas it is set for 181 days in Kotak Active Money.
Liquidation for reverse sweep
You may be wondering what happens if the amount in savings account falls below the threshold limit. For instance in Yes Bank if the balance in the savings account falls below Rs25000, term deposits will be
reverse swept in multiples of Rs 10,000 in to the savings account.
The method of liquidation will be done on a LIFO basis (Last In First Out) meaning the latest deposit will be closed first and proceeds credited to
Savings account. Most of the Banks follow this method as it hurts the depositor the least. Only in SBI the depositor has the option to choose between LIFO or FIFO.
A word of caution here is that the deposits closed prematurely in reverse sweep will earn interest applicable for the period for which they were held less the premature penalty.
Taxation
Though the Banks are giving you the sweep facility, you also need to look at the taxation aspect on interest earned.
While interest on savings account is exempt up to Rs 10,000 under Section 80 TTA (Rs 50,000 u/s 80 TTB for senior citizens) interest on FD is taxable as per your tax slab. It is advisable to know the tax benefits before you opt for sweep in facility.
(The writer is a former banker and is currently with Manipal Academy of Banking, Bangalore)
