NPS Vatsalya Scheme

About

• The NPS Vatsalya Scheme is a new pension plan launched under the National Pension System (NPS), specifically designed for minors.
• Announced in the Union Budget 2024 and officially introduced on September 18, 2024, this initiative aims to promote early financial planning for children and secure their long-term financial well-being.

Budget Allocation 2025

• Tax exemption for NPS will now be extended to NPS Vatsalya as well.
• The extra deduction of up to Rs 50,000 under Sec 80CCD (1B) will be available to Vatsalya under the old tax regime.
• If implemented, taxpayers contributing to NPS Vatsalya accounts (presumably for children, dependents, or specific beneficiaries), would be eligible to claim an additional Rs 50,000 tax deduction under Section 80CCD(1B), similar to the deductions available for regular NPS contributions.

What is the NPS Vatsalya Scheme?

• The NPS Vatsalya Scheme is a pension savings plan introduced by the Pension Fund Regulatory and Development Authority (PFRDA) under the broader National Pension System (NPS) framework.
• This scheme enables parents or guardians to open an NPS account in the name of a minor (below 18 years of age) and manage it until the child reaches adulthood.
• Upon turning 18, the child gains control over the account, and it converts into a standard NPS account.
• The main objective of the scheme is to instill financial discipline, encourage long-term savings, and create a retirement corpus for the minor from an early age.

Key Features of NPS Vatsalya Scheme

• Eligibility
  • Open to Indian citizens below 18 years of age, including:
    • Resident Indians
    • Non-Resident Indians (NRIs)
    • Overseas Citizens of India (OCIs)
  • The account must be operated by a parent or legal guardian until the minor turns 18.

• Account Operation
  • A parent/guardian manages the account on behalf of the minor.
  • Once the minor reaches 18 years of age, the account is transferred to their name.
  • A Know Your Customer (KYC) process is mandatory within three months of attaining majority.

• Contributions
  • Minimum annual contribution:
    • ₹1,000
  • No upper limit on contributions
  • Initial contribution at the time of account opening:
    • ₹1,000

• Investment Options
  • The NPS Vatsalya Scheme provides two investment choices:
    • Default Choice – Moderate Lifecycle Fund (LC-50)
  • Up to 50% allocation in equity, with the remaining portion in corporate bonds and government securities.

• Active Choice
  • Allows account holders to manually select asset allocation between:
    • Equity (E)
    • Corporate Bonds (C)
    • Government Securities (G)
  • This gives flexibility to customize investments based on risk appetite.

Partial Withdrawals – Rules & Conditions

• Withdrawals allowed after 3 years of opening the account.
• Up to 25% of the contributed amount can be withdrawn for:
  • Education expenses
  • Treatment of critical illnesses
  • Disability-related expenses (if disability exceeds 75%)
• A maximum of three partial withdrawals can be made before the minor turns 18.

Exit & Maturity Options

• Once the minor turns 18, they have the following options:
  • Withdraw 20% of the total corpus as a lump sum.
  • Reinvest 80% into an annuity plan to ensure regular pension payments.
  • If the total corpus is below ₹2.5 lakh, the entire amount can be withdrawn as a one-time lump sum.
• This ensures that the minor receives a stable financial future when they reach adulthood.

Tax Benefits of NPS Vatsalya Scheme

Contributions made towards the NPS Vatsalya Scheme qualify for tax deductions under the Income Tax Act, 1961:

• Section 80CCD (1B):
  • Up to ₹50,000 per annum deduction on contributions.
  • Available only under the old tax regime.
  • Shared with self-contributions to NPS Tier 1 accounts.

This tax benefit makes NPS Vatsalya a tax-efficient savings option for parents planning their child’s future.

How to Apply for NPS Vatsalya Scheme?

Parents or guardians can open an NPS Vatsalya account through two primary methods:

• Online Application (eNPS Portal)
  • Visit the official eNPS website.
  • Select NPS Vatsalya Scheme.
  • Fill in the minor’s and guardian’s KYC details.
  • Upload required documents.
  • Make the initial contribution of ₹1,000.

• Offline Application (Through PoPs)
  • Approach authorized Points of Presence (PoPs) such as:
    • Banks (SBI, HDFC, ICICI, etc.)
    • India Post offices
    • Other registered financial institutions
  • Submit KYC documents (guardian’s ID proof, minor’s birth certificate, address proof, etc.).
  • Make the initial contribution.

Once the account is active, contributions can be made regularly via online or offline modes.

Comparison: NPS Vatsalya vs. Other Child Investment Schemes

Feature	NPS Vatsalya	Sukanya Samriddhi Yojana (SSY)	PPF (Public Provident Fund)
Eligibility	Any minor (below 18)	Only for girl children	Any Indian citizen
Minimum Investment	₹1,000 per year	₹250 per year	₹500 per year
Tax Benefits	Section 80CCD (1B)	Section 80C	Section 80C
Investment Type	Market-linked (equity + debt)	Fixed interest rate	Fixed interest rate
Maturity	18 years (partial withdrawals allowed)	21 years	15 years
Liquidity	Limited (partial withdrawals after 3 years)	Limited (withdrawals after 18 years)	Partial withdrawals after 5 years

This comparison shows that NPS Vatsalya is an excellent long-term investment for retirement savings, while SSY and PPF are better suited for fixed, low-risk returns.

Pros & Cons of NPS Vatsalya Scheme

• Pros:
  • Early financial planning for minors
  • Tax benefits under Section 80CCD(1B)
  • Flexibility in investment choices (equity + debt)
  • Partial withdrawals allowed for education & emergencies
  • Higher returns compared to traditional fixed deposits

• Cons:
  • Market-linked investment (subject to fluctuations)
  • Mandatory annuity purchase at maturity (80% of corpus)
  • Limited liquidity before the child turns 18

Conclusion

• The NPS Vatsalya Scheme is a long-term wealth-building option designed to help parents secure their child’s financial future. If your goal is retirement planning for your child, this scheme offers great benefits.
• However, if you need funds for education, marriage, or other expenses, alternatives like Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF), or mutual funds may be more suitable.

By starting early, you can take advantage of compounding, ensuring a stable and secure financial future for your child.