Finance Minister Nirmala Sitharaman announced the NPS Vatsalya scheme to allow children to open an account and contribute to the National Pension System (NPS) under the supervision of their parents and guardians to save for retirement from a tender age. The idea is to give them more time to build a solid retirement corpus for financial security in old age.

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Under this plan, the account will be transferred to their name upon reaching 18 or adulthood, when they will have a full control of the account.They can also withdraw money up to three times in this period, and three more withdrawals before 60, subject to the specified reasons. Like NPS, it is open to all Indian citizens, resident and non-resident Indians, and overseas citizens of India (OCI).It also borrows all the core features of NPS. However, the government is yet to officially notify the tax rules for contributions parents would make towards the account.

Currently, a NPS subscriber can claim deductions of up to Rs 2 lakh in a financial year for contributions towards a regular NPS account.

Tax benefits In NPS

NPS offers tax deductions under sections 80CCD (1), 80CCD (1B), and 80CCD (2). Section 80CCD (1) allows a deduction from gross total income for contributions to NPS, benefiting both salaried and self-employed individuals. Salaried individuals can claim a deduction of up to 10 per cent of their salary (basic plus dearness allowance). The self-employed can claim up to 20 per cent of their gross total income. However, the maximum deduction under Section 80CCD (1) is limited to Rs 1.5 lakh in a financial year. Section 80CCD (1B) offers an additional deduction of up to Rs 50,000 for contributions to NPS accounts.

Section 80CCD (2) of the Income-tax Act allows salaried individuals to claim a deduction for contributions made by their employers towards the NPS account. The deduction cannot exceed 14 per cent of the salary for government employees and 10 per cent for private sector employees in the old tax regime. However, the 2024 budget increased it to 14 per cent for private sector employees if they opt for the new tax regime. The maximum employer's contribution is capped at Rs 7.5 lakh, inclusive of contributions towards the Employee Provident Fund (EPF) and superannuation funds, if any.

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However, the government has yet to clarify the taxation rules for the NPS Vatsalya scheme, which will be governed by the Pension Fund Regulatory Department Authority (PFRDA). Since tax benefits can be claimed only for investments in the taxpayer's name in most cases, whether the parents can claim deductions for contributions towards NPS Vatsalya is yet to be known. However, despite this lack of clarity, NPS Vatsalya offers a significant opportunity for the new generation to secure their financial future in old age.