NPS Vatsalya is the central government’s new pension plan for children, which Finance Minister Nirmala Sitharaman recently launched. Finance Minister N. Sitharaman announced the Scheme in the Union Budget 2024-25. NPS Vatsalya is a plan for contribution by parents and guardians for minors. It is billed as the government’s “commitment to promote early start in securing children’s financial future”. The scheme will initiate minor subscribers into the scheme with Permanent Retirement Account Number (PRAN) cards.

NPS Vatsalya will allow parents to save for their children’s future by investing in a pension account and ensure long-term wealth with the power of compounding.

The Scheme offers flexible investment options, allowing parents and guardians to make contributions of ₹ 1,000 annually in the child’s name. This makes the scheme accessible to families from all economic backgrounds. When the child reaches age of majority, the plan can be converted seamlessly into a normal NPS account. This new initiative is designed to start early in securing children’s financial future, marking an important step in India’s pension system.

The NPS Vatsalya Scheme will be run under the Pension Fund Regulatory and Development Authority (PFRDA).

The scheme has already attracted significant interest, with 9,705 minor subscribers enrolling on launch day, according to a statement from the Pension Fund Regulatory and Development Authority (PFRDA).

Documentation required

To open an NPS Vatsalya account, the following documents are required:

PAN of the Guardian: The PAN of the parent or legal guardian is mandatory, while a PAN for the minor is not required.

Identity proof: Valid ID for the guardian.

Proof of age: Birth certificate or any government-issued document showing the child’s age.

Taxability

Investments made under the NPS Vatsalya Scheme are classified under the EEE (exempt-exempt-exempt) category. This means that contributions are tax-deductible, with no tax liabilities during investment, accumulation, or withdrawal stages. Investment in tier I of NPS falls under the EEE category, and therefore there are no tax liabilities in all the three stages of investment. Currently, NPS Vatsalya is open only for tier I.

Transitioning to an adult account

When a minor turns 18, their NPS Vatsalya account will automatically convert into a regular NPS account. The subscriber will have to complete the KYC process for the same. This process can be completed online and the subscriber need not visit the points of presence (PoP). The schemes for NPS Vatsalya and regular NPS are the same. On shifting the account to regular NPS, the asset allocation will remain the same, and the subscriber will be able to change it, if required, under the norms of regular NPS.

At 18, investors can either withdraw a portion of their corpus or use it to purchase an annuity.

Currently, most of the parents buy Child Insurance plans. But these are low-return plans with bad insurance coverage. NPS Vatsalya will provide another avenue for parents who want to save money for their kids. Higher equity investment option will give market returns as the money will be locked for longer term.

However, only time will tell the acceptance of such a scheme among the masses.