What are sweep-in FDs and how do they work?

How do sweep-in FDs work?

A sweep-in FD links your savings account to a fixed deposit, helping you earn higher interest on idle money. When your account balance crosses a set threshold, the excess is automatically moved into an FD, typically earning 6 per cent to 7.5 per cent interest compared to 2.5 per cent to
3.5 per cent in a regular savings account. If your account balance falls below the threshold, the bank pulls only the required amount from the FD, leaving the rest untouched. This way, your money stays accessible while earning better returns.

Sweep-in vs regular FDs: What’s the difference?

Regular fixed deposits are locked for a set period, and breaking them early often attracts penalties and lost interest. In contrast, sweep-in FDs are more flexible as they’re linked to your savings account and adjust automatically.

If your balance crosses a set limit, the extra goes into an FD. Need funds later? The bank breaks only what you need, without penalty or paperwork. For instance, if your set limit is ₹25,000 and you have ₹50,000, the extra ₹25,000 is placed in a fixed deposit. If you require
₹5,000, the bank withdraws only that amount, keeping the remaining funds untouched.

Why are sweep-in FDs great for emergency funds?

A good emergency fund should be easy to access while earning decent returns. Savings accounts are liquid but pay low interest. FDs offer better returns but aren’t always flexible. Sweep-in FDs, however, combine the best of both by allowing you to earn higher interest while also keeping funds accessible.

How much would you earn?

Sweep-in FDs typically offer the same rates as regular fixed deposits. However, these rates may vary depending on the tenure and the bank. Currently, banks are offering interest rates of up to 8 per cent per annum on FDs across different durations.

What to keep in mind

Sweep-in FDs differ from bank to bank. They may be offered under different scheme names. Some banks require a minimum savings balance of ₹25,000, while others may set it higher. The threshold for activation also varies. Some banks transfer amounts in fixed multiples — like ₹1,000 or ₹5,000 — while others allow exact sweeps. Interest rates may differ from regular FDs, and tax rules apply. If the interest earned is above ₹40,000 (₹50,000 for senior citizens) in a year, it’s taxable and subject to TDS. Considering this, it is wise to check the bank’s terms and conditions carefully before opting in.

Pros and cons

Sweep-in FDs can fetch you better interest on your savings without the need to manage multiple deposits. You can withdraw funds in an emergency without breaking the entire FD, and unlike overdrafts, there are no penalties or extra fees involved.

However, while they offer flexibility, returns from sweep-in FDs can vary – interest accrues only for the days the money remains in the FD and frequent withdrawals can diminish earnings. Some banks offer lower interest rates for early withdrawals, especially within the first 30 to 60 days.

Additionally, tenure options are often limited, which may not work well for long-term investors. For example, if you open a 1-year sweep-in FD with a ₹50,000 limit and withdraw ₹10,000 in 60 days, you’ll only earn interest for those 60 days on that amount.

Who should consider this?

If you regularly maintain a savings account balance that’s higher than the minimum required, a sweep-in FD is a great tool for building an emergency fund while also offering better returns. It is especially suited for low-risk investors who aren’t keen on monitoring the market.

On the other hand, if you tend to withdraw money frequently or prefer keeping a low balance in your savings account, a sweep-in FD may not be the right fit. When making the decision, identify your need and goal – quick access to funds, better returns, or a balance of both. This will help you pick the right savings or investment option.

The writer is CEO, BankBazaar.com