NPS Vatsalya vs Public Provident Fund: How these long-term savings schemes have different goals

NPS Vatsalya scheme: Finance Minister Nirmala Sitharaman launched NPS Vatsalya in a bid to promote long-term investment habit focused on children. The National Pension System (NPS) Vatsalya Scheme, introduced by the government, is designed to enable individuals below the age of 18 to initiate a savings account within the National Pension System, with the guidance and supervision of their parents or legal guardians. 

The management and oversight of this scheme are under the jurisdiction of the Pension Regulatory and Development Authority (PFRDA). Prior to this scheme, participation in the NPS was limited to individuals aged 18 and above. By facilitating the early commencement of savings through the NPS Vatsalya Scheme, parents are afforded the opportunity to strategically plan and secure their children's financial future with a foresight of at least 15 to 20 years. 

Sitharaman, in an event on Wednesday, said the NPS as a scheme has given the government sector around 9.5% CAGR since its inception. For the non-government sector, the return in the equity segment has been 14 per cent, 9.1 per cent in corporate debt, and 8.8 per cent in government securities, since inception. The scheme would allow parents to secure their children’s long-term financial future. 

Top features of NPS Vatsalya

The NPS Vatsalya account is designed for children under 18 years of age, allowing parents or guardians to open and contribute funds on behalf of the minor. Upon the child turning 18, the account seamlessly transitions into a regular NPS account, ensuring continuity for their retirement savings journey. With a minimal annual contribution of just Rs 1,000, this scheme offers all the features of a standard NPS account, including the ability to choose investments, asset classes, and pension fund managers.

Opening an NPS Vatsalya account is convenient and accessible through various Points of Presence (POPs) such as authorised banks, post offices, or online platforms. This option is not restricted to Indian citizens but extends to non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) as well.

The current policy allows individuals to withdraw a maximum of 25% of the funds, with a limit of three withdrawals, following a 3-year lock-in period for purposes related to education, specific illnesses, and disability.

Moreover, individuals are eligible to exit the scheme once they reach 18 years of age.

Specifically, if the total funds exceed Rs 2.5 lakh, the individual can opt to withdraw 20% as a lump sum, while the remaining portion must be utilized for purchasing an annuity. 

On the contrary, if the corpus amount is equal to or less than Rs 2.5 lakh, the entire sum can be withdrawn at once. Additionally, in the event of the account holder's demise, the appointed guardian has the authority to withdraw the entire corpus.

How NPS Vatsalya is different Public Provident Fund

The Public Provident Fund (PPF) scheme is a government-backed, long-term investment option designed to encourage savings and wealth growth for individuals. It offers investors an attractive rate of interest and promising returns on the amount invested over the years. 

One of the key benefits of investing in the PPF scheme is that the interest earned and returns accumulated are not subject to taxation under the Income Tax laws of the country. This makes it a tax-efficient investment avenue for individuals seeking to build a secure financial future.

PPF scheme has a minimum tenure of 15 years, which can be extended in blocks of 5 years as desired by the investor. The investment limits for PPF allow a minimum investment of Rs 500 and a maximum investment of Rs 1.5 lakh for each financial year. Investors have the flexibility to make investments in a lump sum or in a maximum of 12 installments throughout the year.

To open a PPF account, a minimum monthly contribution of just Rs 100 is required. It's important to note that any annual investments exceeding Rs 1.5 lakh will not accrue interest and will not qualify for tax savings benefits. Deposits into a PPF account must be made at least once every year for the full duration of the chosen tenure, which is initially set at 15 years and can be extended in blocks of 5 years.

It is important to note that a PPF account can only be held in the name of a single individual, and joint accounts are not permitted.

One of the key advantages of investing in a PPF account is the minimal risk associated with it. Because the PPF is supported by the Indian government, it offers guaranteed, risk-free returns and ensures complete capital protection. This makes PPF a popular choice for investors looking to diversify their portfolios with steady and secure returns.

Difference between NPS Vatsalya and PPF

There a few points to note. PPF is government's guaranteed scheme which makes it safe and but low ROI, whereas NPS has equity-linked returns.

Secondly, PPF is an investment plan, while NPS Vatsalya is a pension plan that stretch more than 18 years. 

"People often mix and compare all investment options, but it's crucial to recognise their fundamental differences. NPS Vatsalya and PPF are two different investment options with separate goals. The first distinction between them is of returns. PPF is government's guaranteed scheme which makes it safe and but low ROI (often hovering between 7-8% annual return); NPS has equity-linked returns which allows it to generate higher ROI," said  Rajesh Khandagale, Head - National Pension System, KFin Technologies.

"Second, the purpose of PPF is to inculcate a sense of investment and safe returns in the investors' mind. But NPS is positioned as a pension plan, meaning longer lock-in, higher compounding, and more wealth creation, all aimed towards one goal - retirement planning. While PPF only has tax benefit of up to Rs 1.5 lakh, NPS offers a potential tax saving of up to Rs 7.5 lakh in a financial year. Due to these reasons, we should not compare NPS Vatsalya with PPF and treat them as two separate investment options," Khandagale said. 

“The NPS Vatsalya scheme encourages the inclusion of diversified investment options, similar to the traditional NPS, ensuring a balanced risk-reward profile for every account holder. This paves the way for future financial independence of children and also offers retirement security to the account holder. It marks a critical step towards building a financially secure future for families while supporting a culture of proactive financial planning and also ensures the country’s workforce is well-prepared for their post-retirement years,” said Preeti Chandrashekhar India Business Leader, Health and Wealth - Mercer, a business of Marsh McLennan.