As a parent, securing your child’s financial future should be your top priority. NPS Vatsalya is one investment option that helps you build long-term wealth for your children, starting retirement planning even before they turn 18. Once they reach 18, the account seamlessly transitions into a regular National Pension System (NPS) account. Two features of NPS Vatsalya are particularly attractive to investors. First, opening an NPS Vatsalya account online in the name of a minor child is easy. You need to select your preferred Central Recordkeeping Agency (CRA), fill out the registration form, upload the necessary documents, choose your pension fund and make an initial payment of Rs 1,000 to activate the account. You do not need a separate account under the minor’s name to join NPS Vatsalya. The second appealing feature is the potential for long-term compounding in equity, which can yield significant returns. For instance, if you contribute Rs 1,000 on your child’s birthday yearly, you could accumulate Rs 5.3 lakh in 20 years, assuming an annual return of 8%. If you keep that amount in the account for another 30 years without making any fresh contributions, your child could receive Rs 1.44 crore at retirement. It is important to note that most government-backed investment avenues for minors, such as PPF or Sukanya Samriddhi Yojana, focus on fixed income and do not offer the same compounding benefits as equity.
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Given these considerations, is NPS Vatsalya the best investment option for your child now? Before being swayed by impressive numbers, let’s understand NPS Vatsalya’s features to understand whether it could be a great investment option for your child.
What is NPS Vatsalya?
Launched in the Budget 2024, NPS Vatsalya is a pension scheme under the National Pension System (NPS) that allows parents to open an account in their child’s name to save for retirement. The structure of NPS Vatsalya closely resembles that of a Tier-1 NPS account.
Who can Open an Account Under NPS Vatsalya?
Parents or guardians can open an NPS Vatsalya account on behalf of a minor child. This option is available for any Indian citizen under 18, including Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs).
When the child turns 18, the NPS Vatsalya account will be transformed into an NPS Tier-1 account. Then, the features and benefits, including exit norms under the NPS Tier-I All Citizen Model, will apply.
What are the minimum and maximum contributions under the NPS Vatsalya account?
To open an NPS Vatsalya account, parents must make an initial contribution of Rs 1,000. After that, they are required to contribute a minimum of Rs 1,000 annually. Notably, there is no maximum limit on contributions to NPS Vatsalya.
What are the Investment Options Under NPS Vatsalya?
NPS Vatsalya offers the same benefits as a standard NPS account. Parents can choose from three investment options:
1. Moderate Life Cycle Fund: This is the default option, where 50% of the contributions are invested in equity.
2. Auto Choice: Here, parents can select from three options based on their risk appetite:
a) Lifecycle Fund – Aggressive (75% equity)
b) Moderate (50% equity)
c) Conservative (25% equity)
3. Active Choice: This option allows parents to determine their investment allocations actively. They can choose to invest up to 75% of their contributions in equity, 100% in government securities or corporate debt, and up to 5% in alternative assets.
Can you Partially Withdraw Money From the NPS Vatsalya Account?
NPS Vatsalya has strict guidelines regarding the withdrawal of funds.
You can prematurely withdraw money from NPS Vatsalya after at least three years of opening the account. Only three partial withdrawals can be made until the minor child turns 18. A maximum of 25% of the contributions, excluding returns, can be withdrawn if specific criteria are met. The conditions for partial withdrawal are as follows:
1. Education of the minor child
2. Treatment of specified illnesses of the minor subscriber
3. Disability of more than 75% of the minor child
What are NPS Vatsalya’s Exit Rules?
At 18, the child can choose to exit the NPS Vatsalya account. If the child decides to do so, 20% of the accumulated amount will be paid as a lump sum, while the remaining 80% will be used to purchase an annuity. The pension (annuity) will begin at this time. However, if the total corpus at 18 does not exceed Rs 2.5 lakh, the entire amount will be paid out as a lump sum to the child.
NPS Vatsalya Features: All you Need to Know
| Who can join? | Parents or guardians can open an account on behalf of a minor (below 18 years) |
| Minimum Investment | Rs 1,000 per year |
| Maximum Investment | No cap on maximum investment |
| Investment Mode | Default option; Active Choice and Auto Choice |
| Partial Withdrawal | Allowed after three years of opening the account; up to 25% can be withdrawn (excluding returns) under certain conditions |
| What happens when child turns 18? | The NPS Vatsalya account converts to an NPS Tier-1 account that can be continued till 60 |
| Exit Rule | Available after the child turns 18; 20% of the corpus can be withdrawn as a lump sum, and the remaining 80% is used to purchase an annuity |
Pros and Cons of NPS Vatsalya
Advantages of NPS Vatsalya
Good Investment to Build Long-Term Wealth: The most significant advantage of NPS Vatsalya is its potential to help build wealth. Even if you invest a small amount regularly over 18 to 20 years, your investment can grow significantly, providing returns that beat inflation, thanks to its high equity exposure. In contrast, other government-backed investments, such as the Public Provident Fund (PPF) for minors or the Sukanya Samriddhi Yojana, are fixed-income products that are not linked to market performance.
Cost-Effective Option: Another key benefit is that NPS Vatsalya offers a cost-effective structure for investing in equities. Unlike equity mutual funds or stocks, which typically incur higher charges, NPS Vatsalya allows you to invest in equities with lower fees. Additionally, NPS Vatsalya is a valuable tool for instilling financial discipline in your child. Once your child reaches adulthood, they can take over the account and continue investing regularly, ultimately benefiting at retirement. Passing on the value of financial literacy and understanding is a significant inheritance.
Tax Benefits for Investing in NPS Vatsalya: Contributions made to NPS Vatsalya will now qualify for deductions under Section 80CCD(1B) of the Income Tax Act, just like the current NPS. Taxpayers can now claim deductions of up to Rs 50,000 for investments in both NPS and NPS Vatsalya combined. It is important to note that this deduction is only available under the old tax regime.
Disadvantages of NPS Vatsalya
The limitations associated with NPS Vatsalya raise important considerations for parents contemplating it as an ideal investment choice for their children.
Liquidity Restrictions: Firstly, the limited liquidity of NPS Vatsalya can pose a challenge. You can only withdraw 25% of the contributions for the child’s education or treatment of a special illness or disability. Parents can withdraw funds only thrice before the child turns 18. Therefore, accessing this money can be difficult if you need the funds for other purposes while your child is growing up.
Focussing on Retirement Planning Instead of Other Financial Goals: For many Indian parents, funding a child’s education, marriage, or business setup takes priority. However, if you require funds for your child’s education when they turn 18, you may be unable to withdraw the entire NPS Vatsalya corpus if it exceeds ₹2.5 lakh. The requirement to invest 80% of the accumulated amount in annuities can pose a challenge in achieving your child’s immediate financial goals.
No Control Over the NPS Vatsalya Account When the Child Turns 18: Once your child turns 18, the account will convert into an individual NPS account, and you will lose control over it. This raises concerns, especially if your child does not yet have the skills to manage money effectively at a young age.
Not for Risk-Averse Investors: Additionally, while NPS is often viewed as a balanced investment, NPS Vatsalya still involves market risks due to its equity component, which may be off-putting for very risk-averse investors.
Prioritise Your Retirement First, Then Your Child’s: NPS Vatsalya is designed to be more suitable for building a retirement corpus than for other financial goals like higher education. While securing your child’s financial future is essential, retirement planning should not necessarily be prioritized for them. Focusing on building a retirement fund for their children may not be the most pressing concern for most individuals who are not financially secure in their own retirement. Instead, investing in avenues that will help address essential financial goals and your own retirement planning is better. You should consider your child’s retirement only after taking care of other crucial goals, such as establishing an emergency fund, purchasing insurance, and saving adequately for their future.
