8. NPS Vatsalya

Indian parents are well-known for going above and beyond to provide for their children, working hard to leave them a secure future. NPS Vatsalya is a financial reflection of that sentiment. It is for parents who want to save for their child’s retirement. 

NPS Vatsalya is a retirement account where the minor is the beneficiary. The account is opened in the child’s name but managed by a guardian, who makes regular contributions until the child becomes an adult.

The entire investment process for NPS Vatsalya works just like the NPS Tier 1 account. 

Remember how we compared NPS Tier 1 to the responsible elder sibling and NPS Tier 2 to the carefree, happy-go-lucky younger one? For those who missed it, we call them that because Tier I comes with a lot of restrictions/conditions, while Tier II is more flexible and restriction-free.

NPS Vatsalya, the newest member of the NPS family, is the youngest sibling but has similar features to the elder one. 

NPS Vatsalya requires a minimum monthly contribution of ₹1,000 per annum, and the funds can only be accessed in some stated situations. At 18, this account transitions to a normal NPS Tier I account but without a guardian. The beneficiary would then have a choice to continue with that NPS account or exit by purchasing an annuity plan. 

Account Opening Requirements

To begin, you’ll need to approach a Point of Presence (POP) or Central Recordkeeping Agency (CRA) to open the account. You’ll also have to select your Pension Fund Manager and decide between the Active or Auto investment choice.

• The minor must be a citizen of India.
• The guardian can be a Non-Resident Indian (NRI) or Overseas Citizen of India (OCI).
• A separate application form is required for guardians who are NRIs or OCIs.
• A bank account (NRE or NRO) is mandatory if the guardian is an NRI or OCI.

Similar to the Tier 1 auto choices, NPS Vatsalya offers three options:

• Conservative: 25% exposure to equity.
• Moderate: 50% exposure to equity (this is the default option).
• Aggressive: 75% exposure to equity.

These options maintain the same allocation across equity, government securities, and corporate bonds, just like in Tier 1.

If you opt for the Active Choice, you can invest up to 75% in Scheme E and up to 100% in Schemes C and G. However, for Scheme A, the allocation is capped at just 5%.

The minimum annual contribution is ₹1,000, which mirrors the requirement for Tier 1, though the initial contribution to open the account is also ₹1,000 (for adults, it’s just ₹500). The Permanent Retirement Account Number (PRAN) will be issued in the minor’s name.

Documentation Required

1. Proof of Date of Birth for the minor: This can be a birth certificate, school leaving certificate, matriculation certificate, PAN, or passport.
2. KYC of the Guardian: Includes proof of identity and address (Aadhaar, Passport, Voter ID, etc.).
3. PAN of the Guardian or a Form 60 declaration.
4. In the case of NRIs or OCIs, the guardian’s NRE/NRO bank Account (either solo or joint with the minor) is required.

Upon reaching 18 years of age, the account seamlessly transitions to NPS Tier I (All Citizen Model). The minor will need to complete a fresh KYC within three months of turning 18, and the guardian will become the nominee of the account. After transitioning, all the features and exit norms of the regular NPS Tier I account will apply.

Partial Withdrawal Option

Partial withdrawals from the NPS Vatsalya account are allowed to address contingency situations. This is allowed after three years from opening the account – 

• Education of the minor subscriber.
• Treatment of specified illnesses of the minor.
• In the case of a disability of more than 75%.

A maximum of up to 25% of the contributions (excluding returns) can be withdrawn for these purposes. Partial withdrawals are allowed three times before the minor turns 18, with a minimum lock-in period of three years from the date of account opening.

Tax Benefits on NPS Vatsalya

NPS Vatsalya comes with tax benefits too. Parents contributing to it can claim a deduction under Section 80CCD(1B), which was originally introduced to allow a deduction of up to ₹50,000 for contributions to an NPS Tier 1 account.

Budget 2025 has extended this benefit to NPS Vatsalya as well. However, the ₹50,000 limit applies to both Tier 1 and Vatsalya contributions combined. This benefit is available only under the old tax regime. This will be applicable from FY 25 onwards, that is starting April 1, 2025.

If you withdraw the amount before maturity after claiming a tax benefit, it will be taxed again. However, no tax applies if the account is closed due to the beneficiary’s unfortunate passing.

Partial withdrawals allowed under NPS Vatsalya for reasons such as education or specified illnesses are tax-free for parents, provided they do not exceed 25% of the total contributions made until then.

Should you invest?

Let’s take a look at the intent of NPS Vatsalya:

1. To build a savings habit in children from a young age.
2. To secure their financial future by investing for their retirement.

The first point makes a lot of sense. Having an account maintained in their name and communicating with them about it can help them develop a mindset of saving for their own retirement.

I like this interesting proverb: “Give a man a fish, and you feed him for a day; teach a man to fish, and you feed him for a lifetime.”

Saving a token amount and letting the child understand the importance of retirement may be equivalent to teaching a kid to fish. But investing entirely for their retirement is like both feeding them fish and teaching them how to fish.

Even a modest investment in NPS Vatsalya, along with the right guidance, may very well do the job.

That said, personal finance is a very personal choice. Even if you, as a parent or guardian, want to save enough for their retirement, here are the key points to note:

• Before you even think about planning for your child’s retirement, ensuring you’ve saved enough for your own future, your child’s education, and other important financial goals like buying a home, a car, or even taking that dream family vacation is crucial.
• You can only withdraw up to 25% of the corpus for educational purposes, which can only be done three times over the entire investment period. Education is a prime requirement for many parents when the child reaches higher education age.
• Additionally, the product’s maximum equity exposure is 75%, which may not be as aggressive as needed for long-term growth.
• Finally, when the child reaches 18, they can exit the scheme if they believe NPS is not a suitable product for them. However, at least 80% of the corpus must be used to purchase an annuity, further restricting flexibility.

Key takeaways

1. NPS Vatsalya can be a tool for parents to instill financial discipline in their kids.
2. This scheme is very similar to the NPS Tier 1 account, with similar contribution and withdrawal restrictions.
3. At the age of 18, the Vatsalya account transitioned to a normal NPS Tier I account unless exited.
4. Partial withdrawal is allowed for education, specific illnesses, or in cases of a disability of more than 75%.
5. If the beneficiary exits the scheme before age 60, 80% of the corpus must be used to buy an annuity plan.