Savings Accounts with Auto-Sweep Facility: Optimise Your Idle Funds

Disclaimer: Ujjivan Small Finance Bank does not offer a Savings Bank Account with auto-sweep facility. This blog is written for the users to understand about auto-sweep facility.

Auto-Sweep facilitates convenience and efficiency, allowing investors to maximise their savings without having to monitor their account, In this blog, we have explained how Auto-Sweep facility works and the benefits it offers. 

How Auto-Sweep Facility Works

Let's assume your Savings Account has a pre-defined threshold of ₹10,000. You have deposited ₹40,000 in your Savings Account. The remaining ₹30,000 - the excess funds - would be "swept out" into the linked FD account. FDs offer higher interest rates compared to Savings Accounts, allowing you to make the most of your savings. 

Similarly, if your Savings Account balance falls below the threshold, the Auto-Sweep feature 'sweeps in' the amount needed from FD, ensuring easy accessibility to funds. 

Benefits of Auto-Sweep Facility

1. Increased Interest Income

Auto-sweep accounts can significantly increase your interest earnings by automatically moving excess funds to fixed deposits. This helps you benefit from higher interest rates that FDs offer. According to a study by CRISIL, sweep-in accounts can potentially earn 1-2% higher interest compared to regular savings accounts.

2. Effortless Fund Optimisation

The entire process is automated mitigating the need for any manual intervention. A survey by the Indian Banks' Association found that customers with sweep-in accounts spent 60% less time on active fund management compared to those with traditional accounts.

3. No Penalty on Withdrawals

During cash crunch, FD depositors may resort to withdraw funds from their FD. Premature withdrawal of funds may come with penalty charges, reducing potential interest earnings. That doesn't happen if you have an Auto-Sweep Savings Account, especially when the money from your FD is wept in. You can get access to funds whenever needed without any penalties.

Considerations When Choosing a Sweep-In Account

While sweep-in accounts offer numerous benefits, it's important to consider certain factors before opting for one.

1. Minimum Balance Requirements

Most banks require a higher minimum balance for sweep-in accounts than regular savings accounts. It's crucial to ensure that you can consistently maintain this balance to avoid penalties.

2. Interest Rate Structure

Different banks offer varying interest rate structures for auto-sweep accounts. Some may offer a flat rate, while others may have a tiered structure based on the deposit amount. Understanding these structures is key to maximising your returns.

Impact on Personal Finance Management

1. Improved Financial Discipline

Auto-sweep accounts may encourage better financial discipline. A National Institute of Bank Management study found that individuals with sweep-in accounts were 40% more likely to maintain higher savings balances than those with regular accounts.

2. Enhanced Emergency Fund Management

Auto-sweep accounts can serve as an effective tool for managing emergency funds. If your Savings Account falls below the threshold, the required amount is automatically pulled from the linked FD, ensuring liquidity during emergency.

Is the Interest Earned on Auto-Sweep Account Taxable?

The interest income earned on Savings Account is taxable under the Income Tax Act, 1961. However, deductions under Section 80TTA and Section 8TTB are allowed on the interest earned on savings account. That said, unlike FDs, banks do not deduct TDS on Savings Account interest. 

Under Section 80TTA, interest up to ₹10,000 is not taxable - this is applicable for cooperative banks, post offices and savings bank accounts.  Section 8TTB is specifically meant for senior citizens that allows them to claim deduction up to ₹50,000 per year on the interest earned on savings account.