Finance Minister Nirmala Sitharaman on September 18 rolled out National Pension System (NPS)-Vatsalya, a scheme meant for parents who wish to create a long-term corpus for their children.
At an event in Delhi, the finance minister distributed PRAN (permanent retirement account number) cards to minor children. "Through NPS Vatsalya, children will get the advantage of the kind of returns that regular NPS funds generate over the long term. My appeal to all parents is when you attend a birthday party of a child, you can take cakes or other gifts, but money to invest in NPS Vatsalya will also be a form of gift. It will be a lifelong contribution for the child’s future," Sitharaman said at the launch.
Pension Fund Regulatory and Development Authority (PFRDA) Chairman Deepak Mohanty emphasised the importance of starting early. "People may not always treat retirement planning as a priority. A need was felt for a pension scheme that will inculcate early savings and investment culture. NPS Vatsalya is a step towards providing social security for all. It enables us to tap into the power of compounding to accumulate substantial wealth over time," he said.
What is NPS Vatsalya?
Through this scheme, parents can invest in the name of their children up to the age of 18 years. The objective is to create a corpus for their children over the long term. Like the regular NPS accounts, the PFRDA will be the regulator for this scheme too.
Who is eligible for this scheme?
Minors (children under 18 years of age) are eligible
Parents or guardians can open and operate the accounts on behalf of such minors
What is the procedure to open NPS Vatsalya accounts?
Parents or guardians can open the account and start contributing through any major bank, post office, pension funds’ offices or even through the e-NPS portal.
What documents are needed to start investing?
- Parents KYC is essential - proof of identity and address. The PFRDA website lists Aadhaar, driving licence, passport, voter's ID and so on as valid documents
- PAN of parents/guardians
- The child's date of birth proof - birth certificate, PAN, school leaving certificate, PAN etc
- In the case the parents/guardians are NRIs, then NRE/NRO account of the child will be needed
- Under NPS Vatsalya, parents can contribute a minimum of Rs 1,000 annually in the name of their children
- There is no maximum cap
- Once minor children attain the age of majority (18 years), it will transition to a regular NPS account
As in the case of the standard NPS accounts, parents can select any of the NPS pension fund managers, and pick either active or auto choice for making investments. The maximum exposure to equities, an asset class that is considered risky but has the capability to deliver the best returns over the long-term, is capped at 75 percent.
Benefits under the scheme
The effect of compounding over the long-term can ensure that even smaller amounts invested regularly grow into a substantial corpus by the time children turn into adults and start drawing their own income. It will also inculcate savings discipline for children as also their parents.
Moreover, NPS funds have delivered remunerative returns since inception (2009 in the case of private sector NPS). "Funds have generated competitive returns since inception. For the government sector, it's 9.5 percent CAGR (compounded annualised growth rate)," Sitharaman said. For the voluntary, non-government sector (all-citizens-model and corporate model) equity funds have generated a return of 14 percent CAGR since inception, while returns generated by corporate debt and government securities are 9.1 percent and 8.8 percent respectively.
“While the decision ultimately rests with individual parents, investing in this scheme is a good option they should consider…NPS continues to be a product with one of the lowest cost structures as compared to many other savings options in the market and NPS Vatsalya would enjoy the same cost structure,” says Preeti Chandrashekhar, Business Leader – Health and Wealth, Mercer India.
Also read: NPS Vatsalya announced in Budget 2024
Does this scheme offer any tax benefits?
Clarity is awaited on this aspect. The details released by the PFRDA and the finance ministry do not make any mention of additional tax breaks for this scheme.
What doesn't work
Parents keen on investing in this scheme need to be aware of premature, partial withdrawal options, as the possibility of having to dip into this corpus to fund their children's education costs can always arise.
This is where the scheme's proposition takes a beating. If regular NPS' partial, premature withdrawal rules are extended to Vatsalya, subscribers will be able to withdraw only up to 25 percent of their own contribution before the age of vesting (60 years) to fund important needs such as children’s education, critical illness treatment, house purchase and so on. They can make such withdrawals after three years (of account opening) and only three times during the entire tenure.
Also read: How to open an NPS account online
“A parent/guardian of a minor can open an NPS account and contribute regularly to the scheme, and once the minor attains majority, the account will be converted to a regular NPS account. This essentially means this is an account to save for the minor’s retirement,” says Mrin Agarwal, Founder, FinSafe India, a financial advisory firm.
Under a regular NPS account, the age of vesting - when final withdrawal can be made - is 60 years. At that point in time, subscribers can withdraw up to 60 percent as tax-free lump-sum, while the balance has to be mandatorily used to purchase annuities, which will then ensure pension income for life. “Individuals find it challenging to channel savings into retirement schemes due to high expenses and short-term goals. To expect people who themselves may not be saving for retirement to think of their children’s old age is a bit much to digest,” she adds.
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