Is NPS Vatsalya retirement scheme for your child too far-fetched an idea?

While the scheme allows you to plan for your child's retirement well after you may be gone, you should focus first on your retirement and kids' education

If you are a young parent, what financial goals are at the top of your mind? Building an emergency fund, planning for your children’s education, purchasing a house, securing your retirement, arranging for your children’s weddings, and ensuring parental care are some of the obvious ones. The truth is, personal finance is exactly that — personal. Your financial goals can span a broad spectrum, unique to your aspirations and circumstances. 

 

However, one goal that often does not find a place in a young parent’s list is their children’s retirement. Most parents instinctively leave that responsibility to their children. This is exactly the problem that the National Pension System (NPS) Vatsalya aims to solve. This retirement and pension solution is specifically designed for children — a concept that may seem unnecessary to many parents. 

 

This is not to undermine the utility of the NPS itself. NPS has its own set of merits and demerits. But when used wisely, it can form a vital part of your retirement portfolio. In this article, we will focus on NPS Vatsalya, its workings, tax implications, and whether it is a worthwhile investment for your child’s future. 

 

  How does NPS Vatsalya work? 

 

NPS Vatsalya is a retirement and pension plan tailored for minors. The account is opened in the name of the minor, referred to as the beneficiary. While the child is a minor, the account is managed and funded by the guardian. Once the child attains adulthood, they gain full control of the account. At this stage, the child has the option to exit the scheme or continue with it. 

 

If the account is not closed when the child turns 18, it converts into a regular NPS account, subject to the rules governing NPS. Upon reaching the age of 60, the beneficiary can withdraw a portion of the accumulated corpus as a lump sum and use the rest to purchase an annuity plan, which provides a pension. 

 

The same investment options are available in NPS Vatsalya as in a regular NPS scheme. 

 

  What are the tax benefits of NPS Vatsalya? 

 

The tax benefits associated with NPS generally come in two stages: at the time of investment and at the time of withdrawal or exit. Currently, there is no government notification clarifying whether NPS Vatsalya contributions qualify for tax benefits under Section 80CCD. While clarity on tax benefits specific to NPS Vatsalya is awaited, it is reasonable to expect that a notification may address this gap soon. 

 

Once the child reaches adulthood and the account transitions to a regular NPS Tier-1 account, all the applicable tax rules and benefits of NPS Tier-1 accounts come into effect. Similarly, at maturity or exit, the tax concessions associated with regular NPS Tier-1 accounts will apply. 

 

  Should you consider NPS Vatsalya for your child? 

 

For most parents, the priority is to provide a good education and a secure upbringing to their children. Unfortunately, NPS Vatsalya does little to address these immediate needs. The scheme is aimed at securing a distant future, one that most parents are unlikely to witness, as the funds remain locked until the child turns 60. 

 

If financial support is needed for your children as they grow, NPS Vatsalya is not designed to offer liquidity or flexibility. Products like the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), or mutual funds are better suited to meet goals like education, weddings, and other near-term needs, providing both growth and liquidity. 

 

If your child is five years old, the NPS Vatsalya account will mature after 55 years. The unpredictability of how the product and its tax treatment might evolve over such a long period adds another layer of uncertainty. 

 

This is not to suggest that the product design is flawed. NPS, including NPS Vatsalya, is a robust retirement product. However, as a parent, your focus should be on your retirement first. Let your children plan their retirement independently. While opening an NPS Vatsalya account for your child might seem like ticking a box, allocating significant resources to it is unlikely to yield meaningful benefits. 

 

Focus on securing your financial future and meeting your immediate goals before worrying about your child’s retirement. 

 

(The writer is a Sebi-registered investment advisor) 

 

  

 

NPS Vatsalya: Exit and Partial Withdrawal Rules 

 

Partial withdrawal 

 

Permitted after 3 years of account opening. 

 

Allowed in specific situations on declaration basis: Education of minor subscriber, treatment of specified illnesses of minor subscriber, and more than 75 per cent of the minor subscriber. 

 

You can only withdraw up to 25 per cent of the contributions (excluding returns). That almost kills the utility of partial withdrawal. 

 

You can make a maximum of 3 partial withdrawals until the age of 18. 

 

Exit at the age of 18 

 

Once the minor turns 18, s/he can exit the NPS Vatsalya account. 

 

However, in such a case, only up to 20 per cent of the amount can be taken out lumpsum. The remaining (at least 80%) must be used to purchase an annuity plan. 

 

Please note, after the age of 18, NPS Vatsalya is converted in a regular NPS account (if the child chooses not to exit the account). Hence, the rules for NPS will apply thereafter. 

 

Regular Exit (after the age of 18)  

 

Happens at the age of 60. You can postpone the exit from NPS until the age of 75. At that time, you can withdraw up to 60 per cent of the corpus lump sum. The remaining amount (at least 40 per cent) must be used to purchase an annuity plan. 

 

Premature exit (after the age of 18)  

 

Can happen only after completing 10 years in NPS. In the event of exit before the age of 60, at least 80 per cent of the accumulated corpus must be used to purchase an annuity plan. Only 20 per cent of the corpus can be withdrawn as a lumpsum.