India stands at a unique inflection point in its demographic journey. With a median age of just 28.2 years, our country is one of the youngest in the world, reflecting a demographic profile that promises vibrant economic growth and a dynamic workforce. Recognising the pivotal role of its youth, the recently tabled Union Budget 2024-25 placed a strong emphasis on securing the financial future of the next generation.

Addressing the Savings Gap

India’s demographic advantage masks a pressing concern highlighted by the National Statistical Office’s (NSO) “Elderly in India 2021” report, which projects that the number of elderly individuals in India will increase by a substantial 40 per cent by 2031. As the next generation comes of age and life expectancies rise, a growing strain on pension systems and social security nets is expected, highlighting the need for proactive financial planning today.

The prospect of living longer than anticipated can result in our next generation facing the risk of outliving their retirement savings. Recognising this concern early on, the budget introduced measures aimed at equipping young individuals with the tools they need for financial stability. One such step is the National Pension System (NPS) Vatsalya scheme.

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A Closer Look at the National Pension Scheme

The National Pension System (NPS) is a government-sponsored pension scheme, known for its disciplined and systematic approach to long-term savings. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the NPS has emerged as a critical tool for ensuring financial security post-retirement, with 7.5 crore subscribers as of June 30, 2024. Research by the Pension Fund Regulatory and Development Authority (PFRDA) indicates a 22 per cent annual growth in NPS contributions, highlighting its increasing acceptance among both employees and employers as a viable retirement savings option in India.

NPS investors have the option to allocate their contributions among various asset classes, including government securities, corporate bonds, equities, and alternate assets, depending on their risk tolerance and retirement goals. Moreover, with minimal fees, the scheme is beneficial for both short-term and long-term investors as it ensures that more of the invested funds are directed towards generating returns.

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Extending Benefits to Minors

With the aim to promote better financial planning from a young age, the Union Budget for 2024-25 has proposed the NPS-Vatsalya scheme. This initiative is designed to cultivate early savings habits by enabling parents and guardians to contribute to the National Pension System (NPS) on behalf of their minor children. This early start can result in a significantly larger savings corpus in their later years. Furthermore, upon reaching adulthood, the accounts established under the NPS-Vatsalya scheme seamlessly transition into regular NPS plans. This continuity ensures that the savings habits developed during childhood are maintained into adulthood.

In addition to encouraging savings, NPS-Vatsalya aims to enhance financial literacy among young individuals. Through active participation in the scheme, individuals have the opportunity to introduce important financial concepts and investment strategies to younger children. This early education in savings will lay the foundation for a financially sound and informed youth in the years to come.

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The Evolving Role of Employers in Shaping Retirement Security

The Union Budget 2024-25 also proposed an increase in the amount allowed as deduction in employer’s contributions to the National Pension System (NPS) from 10 per cent to 14 per cent under the new tax regime that highlights a significant enhancement in the role of employers in supporting long-term financial and social security for their employees. Additionally, this enhanced amount gives greater tax incentive where one can now claim 14 per cent of their basic salary as tax benefits making NPS investment more attractive. By raising the contribution rate, employers have the opportunity to contribute more to their employees’ retirement savings. This increase reflects a commitment to fostering a more secure retirement environment and acknowledges the growing need for multi-stakeholder support in engendering financial resilience.

This policy shift also intrinsically aligns with the government’s vision of fostering a robust retirement savings culture, ensuring better post-retirement income for the workforce. This change is particularly significant in a country like India, where social security nets are limited, making employer-supported retirement savings crucial.

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Embracing a Forward-Thinking Approach to Financial Planning

The Union Budget 2024-25 embodies a forward-looking vision for securing the financial future of India’s next generation. By emphasising job creation and upskilling, the government showcases a comprehensive approach to economic growth for our youth. Hence, the call is now to necessitate active participation from all stakeholders especially the younger generation to become change makers and prioritise long-term financial planning.

The author is the CEO of Max Life Pension Fund Management.