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NPS Vatsalya: How Beneficial Is Its Tax-Benefit Announcement In Budget 2025?

In Budget 2025, tax benefit under Section 80CCD(1B) is proposed to be extended to the NPS Vatsalya scheme. How will this tax benefit extension be useful for people?

February 3, 2025
February 3, 2025

NPS Vatslaya will become the new addition to the tax saving scheme on April 1, 2025. In Budget 2025, Union Finance Minister Nirmala Sitharaman proposed that the scheme be treated the same as the National Pension System (NPS) under Section 80CCD (1B) of the Income-tax Act, 1961. As she said, “It is proposed to extend the tax benefits available to the National Pension Scheme (NPS) under sub-section (1B) of section 80CCD of the Income-tax Act, 1961 to the contributions made to the NPS Vatsalya accounts, as applicable”.

Section 80CCD(1B) offers tax benefits on the additional Rs 50,000 contribution to the NPS. It is over and above the Rs 1.50 lakh contribution under Section 80CCD(1).  However, don’t forget that both these sections offer tax benefits only in the old tax regime. The new tax regime offers tax benefits in NPS only under Section 80CCD(2), which is on the employers’ contribution.

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Also Read: NPS: A Tax Planning Or A Retirement Planning Tool? 

NPS Vatsalya:

Launched on September 18, 2024, NPS Vatsalya is a long-term investment scheme for minors. It works under the NPS framework regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The account can be opened for a minor (less than 18 years). Upon turning 18, it can be converted into Tier-I NPS account.

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How Useful Is The NPS Vatsalya Taxation Announcement In Budget 2025?

Needless to say, the government is gradually paving the way to completely switch to the new tax regime by making it more attractive, like in the Budget 2025, leaving the old tax regime with no better benefits.

Also Read: Government to Discontinue SGB, FM Nirmala Sitharaman Says, ‘Yes, In a Way, On Discontinuation of Scheme

NPS Vatsalya Tax Benefits Only In The Old Tax Regime, Having Fewer Takers:

  • As per the Ministry of Finance press release dated August 2, 2024, “About 72 per cent of taxpayers have opted for the New Tax Regime, while 28 per cent continue to be in the Old Tax Regime” for the assessment year 2024-25. Of the total 7.28 crore income tax returns (ITRs) filed till July 31, 2024, 5.27 crore ITRs were filed in the new tax regime, and only 2.01 crore ITRs in the old regime.

  • Clearly, the new regime has more takers. Amid this, an extension of tax benefits on investment in NPS Vatsalya in the old regime sounds good but may not have many takers.

Also Read: Unified Pension Scheme (UPS): Clarity Is Required On These Five Points Before Choosing Between UPS And NPS

New Tax Regime Rely On Will-Power And Planning On The Part Of Individual:

The new tax regime is a shift from ‘forced investment’ in the form of saving tax to ‘willingness’ to save and invest.

  • According to the Reserve Bank of India’s RBI-NCFE Financial Literacy Survey for India25 per cent of people in India think about retirement savings.

  • The India Retirement Index Study 4.0 (IRIS 4.0) by Max Life Insurance Company Ltd and KANTAR shows that around 42 per cent of the people in metro, tier I, and tier II cities do not plan for retirement and rely on their children for financial and other needs in old age.

With low financial literacy in India; if savings are not incentivised, will people save? In India, where people are reluctant to pay a certified advisor to manage their money or, in some cases, simply cannot afford one, a scheme like NPS Vatsalya, which requires a long-term commitment at a time when one’s own financial future is uncertain, raises questions about its practicality. Where does NPS Vatsalya, with its tax benefits, fit in? It will be interesting to see whether it remains just another scheme or offers some real benefits.

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