NPS Vatsalya is a long-term savings scheme that allows parents to open an account in the National Pension System (NPS) on behalf of their minor children and invest until they reach 18, at which point the account is handed over to them. NPS Vatsalya is similar to a regular NPS account and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Unlike the Sukanya Samriddhi Yojana (SSY) and the Public Provident Fund (PPF), which also allows children to open accounts in their name, with five-year and 15-year lock-in, NPS Vatsalya is for the long-term, until the individual reaches the age of 60 or older.

More Time, More Compounding Growth

The longer you stay invested in the market, the more compounding growth your investments will see. NPS Vatsalya could give you more compounding growth with a longer maturity period.

Kurian Jose, CEO, Tata Pension Management, says , “Any parent / guardian can open an NPS Vatsalya account in the name of a child from the time of birth to the time of the child attaining majority. Post attaining the age of 18, the account seamlessly can be converted into a regular NPS account. It encourages long-term investment, which is generally more rewarding than short-term strategies. It typically has lower management fees compared to other asset classes, which can enhance overall returns.”

Long Way To Go For Pension For All

NPS data shows that as of August 31, 2024, there were some 1.86 crore NPS subscribers across all schemes. A Niti Aayog position paper this year, noted that 78 per cent of India’s older population lacks any pension coverage. Given this background, NPS Vatsalya can go a long way in inculcating positive habits for financial security in old age.

Anuj Kesarwani, a certified financial planner, chartered trust and estate planner, and founder of Zenith Finserve, citing a Max Life study, says, “Seventy per cent of Indians depend on their children to finance their retirement. NPS Vatsalya is exactly the opposite. Parents or children, each should take responsibility because retirement planning is a long-term and costly affair.”

Taxation:

Currently, there is no clarity on the tax benefits of the scheme. If it follows the regular NPS Tier I rules, tax exemptions would only be available under the old tax regime for all citizen models. Without clear information on tax benefits, NPS Vatsalya may seem unattractive.

Potential For Discontinuation By The Child:

A significant factor to consider is that once a child turns 18, they become the sole owner of the NPS Vatsalya account, and only they can continue investing. If they choose not to continue, the purpose is defeated. Additionally, the maturity age of NPS Vatsalya is when the child turns 18 when money is needed to fund higher education. However, only 25 per cent of the corpus can be withdrawn at this point, which may not be sufficient, potentially forcing families to compromise short-term needs for long-term retirement security.

Is NPS Vatsalya Just Another Savings Scheme?

Kesarwani notes, “Investing in a child’s name in NPS Vatsalya, where the child gains control of the money at 18, has several drawbacks”. He says that money (handling) requires maturity. Unfortunately, it doesn’t necessarily come on the 18th birthday of attaining majority. There’s a risk of financial mismanagement, as young adults may lack the maturity to handle large sums responsibly. Also, once the child becomes an adult, parents lose control over how the funds are used. The child may develop a sense of entitlement or dependency on the funds, which may impact their financial independence or work ethic.”

Vatsalya scheme allows three withdrawals before it becomes a regular account; three more partial withdrawals can be made after that. However, people have many other options to meet their short-, long-, and specific-term needs, so they should consider all options accordingly.