Earn FD-like interest on savings accounts:Know the minimum balance, benefits and activation process – here’s a guide to ‘auto-sweep’ accounts

Savings accounts are commonly used for day-to-day transactions, and people usually do not maintain large balances in them because they offer relatively low interest rates. For higher returns, many prefer Fixed Deposits (FDs). However, the main drawback of FDs is that the money remains locked in for a fixed period. Withdrawing funds before maturity results in a penalty imposed by the bank. To address this limitation, several banks now offer savings accounts that provide interest rates comparable to FDs. With these accounts, funds do not need to be locked in, and there is no penalty for withdrawals when money is required. This facility is particularly beneficial for individuals who maintain a substantial balance in their savings account for a certain period. In today’s “Your Money” column, we will explore how you can earn FD-like interest while keeping your money in a savings account. We will discuss: Q: What type of savings accounts offer interest rates similar to FDs? Ans: Regular savings accounts generally offer an annual interest rate of around 2.5% to 3.5%, while Fixed Deposits (FDs) provide higher returns, typically between 6% and 7.5%. To bridge this gap, many banks now offer High-Interest Savings Accounts or Auto-Sweep (Flexi FD) Accounts. In these accounts, any balance above a pre-defined limit is automatically transferred into an FD, allowing it to earn interest at FD rates. Q: What is an auto-sweep account or flexi fixed deposit? Ans: In an auto-sweep or flexi FD facility, your savings account functions like a regular savings account up to a specified balance. Once the balance exceeds this limit, the excess amount is automatically converted into a linked FD, which earns interest at FD rates. For example, if the threshold is ₹25,000 and your account balance rises to ₹40,000, the extra ₹15,000 is automatically placed in an FD. When you need funds and your savings balance falls below the limit, the FD is partially or fully broken automatically, and the required amount is transferred back to your savings account. This ensures higher returns while allowing instant access to your money—without the need to manually break an FD. Q: What are the benefits of the auto-sweep facility? Ans: The auto-sweep facility is ideal for individuals who maintain a high balance in their savings account but do not want their money locked in for a fixed tenure. It offers the dual advantage of liquidity and higher returns. Any surplus amount is automatically invested in an FD to earn better interest, and whenever funds are required, the FD is seamlessly broken to replenish the savings account. This ensures safety, flexibility, and improved earnings on idle funds—without any additional effort from the account holder. Q: What should be done to earn better interest in a high-interest savings account? Ans: Banks generally offer higher interest rates to customers who consistently maintain a higher balance in their savings accounts. In addition, some fintech apps, in partnership with banks, offer interest rates of up to 6.75%. To earn better returns from a high-interest savings account, it is advisable to maintain the highest possible balance. This allows your money to generate better returns without the need for separate investments. Q: Can this facility be applied to all savings accounts? Ans: No, this facility is not automatically available on all savings accounts. It is usually offered with High Net Worth Individual (HNI), premium, or digital savings accounts. However, many banks have started extending features like auto-sweep to regular savings account holders as well. In some cases, customers may need to place a separate request or meet certain conditions. It is best to check with your bank to confirm whether this facility is available for your account and how it can be activated. Q: What is the process for activating an Auto Sweep FD? Ans: To activate the Auto Sweep FD facility, you must first register for it with your bank. This can be done through net banking, the bank’s mobile app, or by visiting a branch. During activation, you select a minimum balance limit, such as ₹25,000 or ₹50,000. Any amount exceeding this limit is automatically converted into an FD. Whenever funds are required, the FD is broken automatically, and the amount is transferred back to the savings account. This ensures safety, liquidity, and better interest earnings. Q: Can the benefits of Auto Sweep FD be availed online? Ans: Yes, the Auto Sweep FD facility can be activated and managed online. Most banks and digital banking platforms offer this option through net banking or mobile apps. Some banks enable this facility at the time of account opening, while others allow customers to activate it later. There is usually no need to visit a branch, and the process can be completed in just a few clicks. Q: What are the disadvantages of Auto Sweep FD? Ans: Auto Sweep FDs have very few drawbacks, but it is important to understand them. In certain cases, the interest earned may be taxable, and penalties may apply under specific conditions. We will explain these aspects clearly with the help of a graphic. Let us understand the points highlighted in the graphic in detail: No Tax Exemption The interest earned from Auto Sweep FDs is fully taxable and is added to your income as per your income tax slab. Unlike tax-saving FDs, this facility does not qualify for deductions under Section 80C. As a result, it may not be suitable for investors whose primary goal is tax saving. Interest Rate May Be Lower Than Regular FDs Some banks offer slightly lower interest rates on Auto Sweep FDs compared to standard FDs. This is because the deposit can be broken instantly when funds are required. Due to this flexibility, long-term investors may receive comparatively lower returns. Lower Interest or Penalty on Early Withdrawal When the savings account balance falls below the pre-set limit, the linked FD is automatically broken. Since this often happens over a short tenure, the interest earned may be lower. In some cases, banks may also levy a penalty ranging from 0.5% to 1%, which reduces the overall returns. Minimum Balance Requirement Savings accounts with the auto-sweep facility require maintaining a minimum balance. If the balance drops below the required level, the bank may charge a penalty or discontinue the auto-sweep facility altogether. Bank-Specific Rules and Conditions The tenure of the FD, applicable interest rates, sweep-in limits, and conditions for breaking the FD vary from bank to bank. Opting for this facility without understanding these terms can lead to unexpected losses. For example, some banks initiate sweep-in at ₹25,000, while others set the threshold at ₹1 lakh. Lower Returns on Short-Term FDs FDs created under the auto-sweep facility are usually for short durations, often 180 days or less. The interest rates on such short-term FDs are lower compared to long-term deposits, which may disappoint investors seeking higher returns.