New Delhi, May 10: If you are looking to secure your child’s financial future, the central government’s NPS Vatsalya Scheme could be an excellent option. This scheme is a special pension plan designed for children, allowing parents or guardians to invest on behalf of their minor children. It not only helps build a substantial fund over the long term but also offers tax benefits.
The NPS Vatsalya Scheme was launched in September 2024 under the National Pension System (NPS). Its primary aim is to provide economic security for children’s futures. The scheme is managed by the Pension Fund Regulatory and Development Authority (PFRDA), and it is expected to yield returns of approximately 9.5% to 10% on investments.
Parents or guardians can open an account in the name of their child, who must be under 18 years of age. The child can be an Indian citizen, an NRI, or an OCI. Until the child reaches adulthood, the account is managed by the parents or guardians.
A minimum annual investment of ₹1,000 is required for this scheme. However, there is no upper limit on the investment amount, allowing parents to contribute according to their financial capacity.
One significant advantage of the NPS Vatsalya Scheme is the tax savings it offers. Under Section 80CCD(1B) of the Income Tax Act, parents or guardians can claim tax deductions on investments up to ₹1.5 lakh. Additionally, there is an extra deduction benefit of ₹50,000.
To open an account, valid documents such as the child’s birth certificate, school leaving certificate, passport, or PAN card are required. Initially, a bank account for the child is not mandatory, but it will be necessary for partial withdrawals or exits before the age of 18.
The NPS Vatsalya Scheme provides three investment options. The first is the ‘Default Choice,’ where 50% of the investment is allocated to equity. The second is the ‘Auto Choice,’ allowing investors to select aggressive, moderate, or conservative fund options.
The third option is ‘Active Choice,’ where parents can decide how much to invest in equity, government bonds, corporate debt, or other assets, with a maximum of 75% in equity.
In certain circumstances, partial withdrawals are permitted. After three years of account opening, parents can withdraw up to 25% of the deposited amount, available a maximum of three times.
Withdrawals can be used for the child’s education, treatment of serious illnesses, or needs arising from disabilities exceeding 75%.
When the child turns 18, they have two options: they can either close the account and withdraw the funds or convert it into a regular NPS account. This requires completing the KYC process within three months of turning 18.
In the unfortunate event of the child’s death, the entire amount is transferred to the nominee. If a parent passes away, the other guardian can continue the scheme by completing a new KYC. If both parents die, a legal guardian can maintain the account until the child reaches adulthood.
Experts believe that starting to invest at a young age benefits from compounding, leading to a substantial fund over time. Thus, the NPS Vatsalya Scheme can serve as a robust financial security option for children’s higher education, careers, and future economic needs.
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