In case of premature withdrawal, how to manage liquidity while avoiding penalties of your Fixed Deposit.
Fixed deposits have always been the preferred way of investing in this country. Irrespective of age, most people in India prefer putting their money in bank fixed deposits. FDs are highly preferred because of their secured nature of investing and good rates of interest, but their liquidity becomes an issue. Because of sudden financial emergencies, you might want to withdraw or close your fixed deposit account before its maturity. Typically, there is penalty charged for premature withdrawals and the interest rate applicable also gets revised depending on your tenure.
Owing to that many banks have introduced a ‘Sweep-in Accounts’ which gives you the benefits of both savings and fixed deposits. Also known as 2-in-1 account, and money multiplier, sweep-in FDs come with a higher yield as compared to a savings account, around 6.80 per cent, while giving you the benefit of liquidity of a savings account. The interest rate offered is mostly similar to what is offered on regular fixed deposits. An additional advantage of sweep-in fixed deposits is you can avoid locking in funds over a long-term in FDs. Most importantly, there is no penalty charged on utilising funds or premature withdrawals.
In a sweep-in account, the account holder has to decide the minimum amount that needs to be kept in their savings account. Any amount beyond that limit in the saving account will automatically get transferred to their FD. Further, when money is needed by the account holder, the bank just transfers (sweeps-in) funds to the savings account.
For instance, if you have Rs 2 lakh in your savings account, and you set the limit to Rs 20,000, the rest Rs 180,000 will get transferred to your fixed deposit account. And in case you require more than Rs 20,000, the deficit will be filled by transferring funds from your fixed deposit accounts into your savings account. However, only a few banks give you the option to set your own threshold limit – others have a fixed threshold limit ranging between Rs 20,000 and Rs 1 lakh.
Along with the threshold limit, most banks also ask to maintain a minimum average balance ranging from Rs 1,000 to Rs 10,000 in your savings account. Also, check the maximum and minimum tenure of your FD account as the tenure of the sweep-in FDs are mostly fixed to one year by a few banks.
Experts believe sweep-in accounts are more suitable for those in the lower tax bracket because the interest earned in an FD is taxable as per one’s income slab. However, the interest earned in a savings account under section 80 TTA is tax-exempt up to Rs 10,000 a year.