Understanding the Drawbacks of Auto Sweep Facility

What is Auto Sweep Facility?

The auto sweep facility is a banking feature that links your savings account to a fixed deposit (FD), automatically transferring surplus funds to earn higher interest. While it offers benefits like improved returns and liquidity, it's essential to understand its potential drawbacks before opting in.

Auto sweep combines the features of a savings account and a fixed deposit. When your savings account balance exceeds a predetermined threshold, the excess amount is transferred into an FD. If your savings balance falls below the threshold, funds are swept back from the FD to maintain liquidity.

Disadvantages of Auto Sweep Facility

1. Premature Withdrawal Penalties

Withdrawing funds from the FD before maturity can attract penalties, reducing the overall interest earned. Frequent withdrawals can diminish the benefits of higher FD interest rates.

2. Complex Account Statements

The automatic transfer of funds between savings and FD accounts can lead to complicated bank statements, making it challenging to track transactions and interest earned.

3. Minimum Balance Requirements

Banks often set minimum balance requirements for auto sweep accounts. Failing to maintain this balance can result in service charges or the deactivation of the auto sweep facility.

4. Tax Implications

Interest earned on the FD portion of an auto sweep account is taxable, which can affect the net returns, especially for individuals in higher tax brackets.

Auto Sweep Facility in SBI

State Bank of India (SBI) offers the auto sweep facility through its Multi Option Deposit (MOD) accounts. In SBI, the minimum threshold balance is ₹35,000, with a minimum resultant balance of ₹25,000. The minimum sweep amount is ₹10,000, in multiples of ₹1,000.

Alternatives to Auto Sweep

If the drawbacks of auto sweep outweigh the benefits for you, consider these alternatives:

• Regular Fixed Deposits: Offer higher interest rates without the complexity of automatic transfers.

• Recurring Deposits: Allow you to save a fixed amount regularly, earning interest over time.

• Liquid Mutual Funds: Provide better returns than savings accounts with relatively low risk and high liquidity.

FAQs

Q1: What is the auto sweep facility?

A1: It's a banking feature that links your savings account to a fixed deposit, automatically transferring surplus funds to earn higher interest.

Q2: Are there penalties for withdrawing funds from the FD in an auto sweep account?

A2: Yes, premature withdrawals can attract penalties, reducing the interest earned.

Q3: Is the interest earned on auto sweep accounts taxable?

A3: Yes, the interest from the FD portion is taxable as per your income tax slab.

Q4: What is the minimum balance requirement for SBI's auto sweep facility?

A4: SBI requires a minimum threshold balance of ₹35,000 and a minimum resultant balance of ₹25,000.

Q5: Can I opt-out of the auto sweep facility?

A5: Yes, you can request your bank to deactivate the auto sweep feature if it doesn't align with your financial goals.