An emergency fund is like your financial safety net — a cushion that protects you from sudden expenses such as medical bills, job loss, or urgent repairs. Experts often recommend keeping at least three to six months’ worth of expenses in this fund. But where should this money sit? Most people simply leave it in a savings account for easy access. While that ensures liquidity, the returns are often modest.
Banks today offer smarter ways to help idle cash work harder while still keeping it liquid. Two popular options are progressive interest slabs on savings accounts and sweep-in facilities that link savings accounts with fixed deposits (FDs). Both can boost your returns, but which one is better suited for an emergency fund? Let’s break it down.
What Are Progressive Interest Slabs?
Progressive or tiered interest slabs are a way banks calculate interest based on how much money you maintain in your savings account. Instead of a flat rate for all balances, higher balances fall into higher interest tiers.
For example, a bank might structure a high yield savings account like this:
- Up to ₹1 lakh → 3% interest
- ₹1–5 lakh → 4% interest (only on the portion above ₹1 lakh)
- Above ₹5 lakh → 5% interest (only on the portion above ₹5 lakh)
This means if you maintain ₹6 lakh, you don’t earn 5% on the entire balance. Instead, you earn 3% on the first ₹1 lakh, 4% on the next ₹4 lakh, and 5% on the remaining ₹1 lakh.
Advantages:
- Simple, automatic, and requires no action from your side.
- Full liquidity — you can withdraw anytime without penalty.
Limitations:
- The highest interest rate applies only to the incremental balance, not the entire amount.
- Effective returns may be lower than you expect if your balance just crosses a slab.
What Are Auto Sweep Facilities?
A sweep facility is a hybrid product that links your savings account to a fixed deposit. When your high yield savings account balance crosses a pre-set threshold (say ₹1 lakh), the extra money is “swept” into an FD automatically.
For instance, if you set the limit at ₹1 lakh and maintain ₹3 lakh, the extra ₹2 lakh will move into a sweep FD earning 6–7%. If you later need funds, the bank automatically “reverse-sweeps” money back from the FD into your account, often breaking the FD in multiples of ₹1,000 or ₹5,000.
Advantages:
- You get FD-level interest rates on surplus funds.
- Liquidity is largely preserved — money is auto-broken and credited instantly when you spend.
Limitations:
- Premature withdrawal reduces the effective FD return slightly.
- Not every bank offers sweep facilities, and the rules (minimum FD unit, tenure) vary.
- Tax treatment is the same as regular FDs, with TDS deducted if applicable.
Comparing the Two Options
Both strategies aim to give you better returns than a standard savings account, but they work differently.
Liquidity:
- Slabs: 100% liquidity — the money is always in your account.
- Sweep: Liquidity is nearly instant, but technically requires FD breaking.
Returns:
- Slabs: Usually offer 3–7% depending on balance tiers.
- Sweep: Can fetch 6–7% (close to FD rates) on surplus funds.
Tax Impact:
- Both are fully taxable under “income from other sources.”
- Sweep FDs may attract TDS if annual interest exceeds ₹50,000 (₹1,00,000 for seniors).
Complexity:
- Slabs: No management required.
- Sweep: Needs threshold setting and monitoring.
|
Factor |
Progressive Slabs | Sweep Facility |
|
Liquidity |
Full, instant | Instant, but via FD break |
|
Returns |
3–7% (tiered) |
6–7% (FD-linked) |
| Complexity | Very simple |
Moderate |
| Taxation | Savings income |
FD income + TDS possible |
Which Works Better for Emergency Funds?
The right choice depends on how much you maintain in your high interest rate savings account (emergency fund).
- Funds under ₹2 lakh: Progressive interest slabs on savings accounts are enough. The simplicity outweighs the marginally higher returns of sweep.
- Funds ₹3 lakh and above: Sweep facilities usually yield better returns because the extra money earns FD-like rates.
- Hybrid approach: Keep a base buffer (say ₹1–2 lakh) in the slab-based savings account for immediate use. Let the rest sit in a sweep facility for higher returns.
At the end of the day, the core principle of emergency funds is accessibility. Chasing maximum yield should not come at the cost of liquidity.
Final Thoughts
Emergency funds are not meant to maximize wealth but to protect you during crises. However, there’s no harm in earning smarter returns while keeping them liquid. Progressive slabs offer simplicity and instant liquidity, making them great for smaller emergency reserves. Auto Sweep facilities deliver higher yields, especially for larger balances, without compromising too much on accessibility.
The best approach is often a blend: keep a fixed base in a slab account for quick access, and let the rest flow into sweep-linked deposits. This way, your emergency fund serves its real purpose — offering both peace of mind and financial efficiency.