NPS Vatsalya Scheme for minors to launch by third week of September

The NPS Vatsalya scheme, announced in the Union Budget 2024, is expected to be officially unveiled by the latter part of September. Positioned as a modified iteration of the National Pension System (NPS) for government and private emplpoees, NPS Vatsalya is envisaged to serve as a pivotal financial instrument, providing parents with a reliable avenue for accumulating wealth over the long term on behalf of their children as they advance in age. 

This initiative aligns closely with the government's overarching goal of fostering financial inclusivity and stability across multiple generations. The Pension Fund Regulatory and Development Authority (PFRDA) and the Central government are reportedly finalising the implementation details in preparation for its imminent rollout, slated within the coming weeks.

Key points

Government-backed NPS-Vatsalya can serve as a meaningful way to provide them with financial support until they start earning and investing on their own.

Under the NPS-Vatsalya, parents/guardians can make on behalf of their minor children with minimum contribution of Rs 1,000 per year and no limit on maximum contribution. 

When the minor reaches the age of 18, their NPS Vatsalya scheme account will undergo a seamless transition into a standard NPS account. At this point, the account holder gains full authority over managing the account, including making decisions regarding investment strategies.

The emphasis on initiating investments at an early stage is intended to establish a sturdy long-term savings avenue that serves individuals across different life phases, extending beyond retirement planning.

In line with the established NPS model, the NPS Vatsalya account is projected to offer a diversified portfolio comprising equity, government securities, and corporate bonds, thereby presenting a well-rounded risk-reward spectrum.

The new scheme is expected to provide a wide range of investment options similar to those available in the traditional NPS. These options encompass a blend of equity, government securities, and corporate bonds, catering to varying risk appetites.

Subscribers are presented with the decision to opt for an automatic choice, where investments are tailored according to the subscriber's age, or an active choice, allowing them to oversee their investment strategy.

The scheme may offer the flexibility for partial withdrawals for educational or medical purposes after three years of opening the account, limited to 25% of the total contributed amount.

Furthermore, there could be a provision to opt out of the scheme when the minor reaches 18 years old. In this case, 80% of the accumulated contribution will be directed towards an annuity plan, and the remaining 20% can be withdrawn as a lump sum.

Why choose NPS-Vatsalya

> The NPS Vatsalya Scheme will instill savings habits in children by offering a seamless transition to a standard NPS scheme once they reach the age of 18. This enables them to independently manage and contribute to their account, fostering financial responsibility from a young age.

> Moreover, the NPS scheme provides portability, allowing individuals to switch jobs without affecting their NPS account. 

> Consequently, a child's NPS Vatsalya account can seamlessly transition into a regular NPS account upon reaching adulthood. This continuity allows for long-term contributions and the accumulation of a substantial retirement fund over the child's lifetime.

> The NPS Vatsalya account can serve as a beneficial retirement fund choice as contributions commence during the child's minority, leading to a substantial accumulation towards the child's retirement. 

> Upon reaching retirement age, the account may allow for a withdrawal of 60% of the accumulated funds, like the NPS accounts. 

Budget 2024 and NPS

In the Budget 2024, the tax deduction limit on private sector employers' contribution to their employees' NPS was increased from 10% to 14% of the basic salary. This adjustment would allow private sector employees to now benefit from a tax deduction of 14% on the employer's contribution to the NPS under Section 80CCD (2). Previously, the limit stood at 10% of the basic salary for private employees, while it was 14% for Central and state government employees. It is important to note that this enhanced tax benefit is exclusively applicable to employees who choose to opt for the new tax regime.