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NPS Vatsalya Scheme: 5 Reasons Why It’s the Best Pension Plan for Kids

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For a long time, the National Pension System (NPS) has been at the heart of retirement planning in India. The Government of India introduced the NPS Vatsalya scheme a pension initiative for minorsin the Union Budget as a progressive measure to promote financial discipline from an early age. It is a child pension plan in India. Designed with minors, it aims to instill early retirement savings habits and ensure long-term financial security for minors (future generations).

FeatureDetails
Target GroupAll Indian minors (up to 18 years)
EligibilityParents/guardians can open the account on behalf of the minor
Minimum Contribution₹1,000 per year
Maximum ContributionNo upper limit on contributions
Investment OptionsModerate (LC-50), Aggressive (LC-75), Conservative (LC-25), Active Choice
Account Transition at 18The account automatically transitions to a regular NPS Tier I account
Tax BenefitsContributions are not tax-exempt, but 60% of the corpus can be withdrawn tax-free
Corpus Growth PotentialReturns depend on market performance, offering ~10% potential returns
Partial WithdrawalsAllowed after 3 years (up to 25% for education, medical emergencies, disability)
Exit Options at MaturityIf corpus ≥ ₹2.5 lakh: 80% annuity, 20% lump sum withdrawal; if corpus < ₹2.5 lakh: Full withdrawal
KYC ProcessKYC must be completed within 3 months of the child turning 18
Taxation on Withdrawal40% of corpus must be used for annuity (taxable as per income tax slab)
How to Open AccountThrough registered PoPs (banks, India Post) or eNPS platform
Partial Withdrawal ConditionsAfter 3 years, for education, medical emergencies, or disability

What is NPS Vatsalya Scheme?

The NPS Vatsalya Scheme is a child pension plan in India regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is designed for all Indian citizens below 18 years of age. The main purpose is to encourage the habit of saving for old age from an early age as well as to create a pensioned society.

How Does the NPS Vatsalya Scheme Work?

Think of it as a retirement savings plan for children! These funds are invested in different asset classes and parents or guardians can contribute to their child’s account. By the time the child turns 18, the retirement fund matures and is automatically converted into a regular NPS Tier I account. NPS (National Pension Scheme) is also similar but it is for adults.

Key Features of the NPS Vatsalya Scheme

Eligibility & Account Operation

  • Eligible for all minor citizens up to 18 years.
  • For minors, Parents/guardians can open the account on behalf of minors.
  • However, the minor is the sole beneficiary of the account.

Contribution Details

  • Minimum Contribution: ₹1,000 per annum.
  • Maximum Contribution: It is flexible to deposit amounts with no maximum limit.

Investment Choices

  • Default Choice: Moderate Life Cycle Fund (LC-50) with exposure to 50% equity defaults.
  • Auto Choice: Aggressive (LC-75), Moderate (LC-50), or Conservative (LC-25) funds are available as Auto Choice.
  • Active Choice: Guardians can actively choose the allocation among equity, corporate debt, government.

Transition at Maturity

  • While the child turns 18, the NPS Vatsalya Scheme account transitions into a regular NPS Tier I account.
  • A fresh Know Your Customer (KYC) process must be completed within 3 months of turning 18 to continue contributions.

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