Nirmala Sitharaman to introduce NPS Vatsalya today: How the scheme will work? Check investment choices, maturity, extension & others

Union Finance Minister Nirmala Sitharaman is set to introduce the latest scheme, NPS Vatsalya, under the National Pension System. Unveiled during the comprehensive Budget unveiling in July 2024, this scheme is tailored for parents or guardians looking to make long-term investments for their minor children. The NPS Vatsalya scheme will be managed under the supervision of the Pension Fund Regulatory and Development Authority (PFRDA).

The National Pension System (NPS) Vatsalya scheme is accessible to all citizens of India, as well as Non-Resident Indians (NRIs), enabling them to establish accounts for their minor children. Legal guardians of minors are also entitled to inaugurate an NPS Vatsalya account. It is imperative to note that the NPS Vatsalya account be registered in the minor's name. 

A key feature of this initiative is that the minor turns 18, parents can convert the account into a regular NPS account, which can accumulate an attractive retirement fund. During the Budget 2024, FM Sitharaman said: “NPS-Vatsalya, a plan for contributions by parents and guardians for minors, will be introduced. Upon reaching the age of majority, the plan can be seamlessly converted into a regular NPS account.”

Some points to note

1. As per the information on the Central Bank of India's website, individuals are required to make a minimum annual contribution of Rs 1,000. It is important to note that there is no maximum limit on the contribution amount.

2. A key feature of the scheme mentioned in the statement is the option for parents to commence saving for their child’s retirement from infancy.

3. The scheme leverages the power of compounding, which can substantially boost returns over an extended investment period. Furthermore, when the child comes of age, their account will seamlessly convert into a standard NPS account. Parents have the flexibility to initiate contributions with as little as Rs 500 per month or Rs 6,000 per year.

4. Investment options: As per the Central Bank of India's website, the NPS Vatsalya scheme can have various variations:

a) Default Choice: The Default Choice option available for investors is the Moderate Life Cycle Fund - LC-50, with a 50% equity allocation.

b) Auto Choice: Under the Auto Choice feature, Guardians are provided with the flexibility to select from a range of Life Cycle Funds which include the Aggressive LC-75 (75% equity), Moderate LC-50 (50% equity), or Conservative LC-25 (25% equity).

c) Active Choice: Active Choice empowers Guardians to take control of their investment strategy by actively determining the distribution of funds among various asset classes, including equity (up to 75%), corporate debt (up to 100%), government securities (up to 100%), and alternate assets (up to 5%).

5. Partial withdrawal rule: Like most schemes, a partial withdrawal option will be available for the NPS Vatsalya account. Upon reaching three years of opening the NPS Vatsalya account, individuals are eligible to utilise the partial withdrawal option. This allows for a maximum withdrawal of up to 25% of the corpus, designated for specific purposes such as education, treatment of specified illnesses, severe disability exceeding 75%, among others, as determined by the PFRDA. 

The SBI Pension Fund website additionally notes that the partial withdrawal facility can be accessed up to three instances until the subscriber reaches the age of 18.

6. Maturity at 18 years: After the minor reaches the age of 18, parents or subscribers are eligible to exit the NPS Vatsalya scheme. According to the Central Bank of India's website, if the total corpus in the scheme is equal to or less than Rs 2.5 lakh, the entire corpus can be withdrawn as a lump sum.

If the corpus exceeds Rs 2.5 lakh, the subscriber can withdraw 20% of the corpus as a lump sum and utilise 80% of the corpus to purchase an annuity for receiving regular income. Furthermore, the subscriber has the option to prolong the NPS Vatsalya account beyond the age of 18 years. 

The NPS Vatsalya account will be converted into a regular NPS Tier - I (All Citizen) account. A fresh KYC process for the minor individual will be necessary within three months of turning 18, as outlined on the SBI Pension Funds website.