A few months ago, I met a young couple, Ravi and Priya, who were excited and concerned about their newborn daughter’s future. Like many new parents,and having their child’s best interest at heart , they wanted to start investing early but were overwhelmed by the numerous options. They asked me, “What’s the best way to secure our child’s future without locking ourselves into rigid plans?”
I told them about my article on child investment plans, where I’d touched on the NPS Vatsalya scheme. It’s a government program, so understandably, they were very curious and wanted details. I was a little hesitant to advise on it just yet, but I do think it’s valuable to explore the features, pros, and cons.
What is the NPS Vatsalya Scheme?
The NPS Vatsalya Scheme is a special offering under the National Pension System (NPS) designed for minors. It allows parents or legal guardians to invest in a diversified portfolio on behalf of their child, ensuring long-term financial security. The account seamlessly transitions to the child upon turning 18, granting them control over a well-established corpus at a crucial stage of life.( Read : How to protect against Financial frauds?)
Key Features & Benefits
1. Eligibility & Account Opening
- For the Child: Available for minors below 18 years.
- For the Guardian: Parents or legal guardians can open and manage the account until the child turns 18.
- Process: Can be opened online via eNPS or offline through a Point of Presence (PoP).
- Documents Required: Birth certificate of the child, guardian’s KYC (Aadhaar, PAN), and proof of relationship.( Read: Know Your Advisor- A Crucial Step for Your Financial Health )
2. Contribution Flexibility
- Minimum Contribution: ₹500 per transaction.
- No Maximum Limit: Invest as per financial capacity.
- Flexible Contributions: No fixed schedule; invest anytime.
3. Investment Options
- Active Choice: Customize allocation across Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Assets (A).
- Auto Choice: Age-based lifecycle approach, adjusting asset allocation over time.
4. Tax Benefits
- Section 80C: Deductions up to ₹1.5 lakh per year.
- Section 80CCD(1B): Additional ₹50,000 deduction over and above Section 80C.
5. Withdrawals & Account Transition
- Partial Withdrawals: Allowed for higher education, marriage, or medical emergencies (up to 25% of corpus).
- Account Transfer: At 18, the child becomes the primary account holder.
- Maturity at 60:
- 60% corpus: Withdraw tax-free.
- 40% corpus: Must be used to purchase an annuity (provides regular pension income, taxable as per slab).
- NPS Vatsalya Account: Maturity and Exit Options :
Transition to NPS Tier-I at 18
The NPS Vatsalya account automatically converts into a regular NPS Tier-I account under the All Citizen Model when the subscriber turns 18 years old. Upon maturity, the account holder has the following exit options:
- If the accumulated corpus exceeds ₹2.5 lakh
- 80% of the funds must be used to purchase an annuity.
- The remaining 20% can be withdrawn as a lump sum.
- If the corpus is ₹2.5 lakh or less
- The full amount can be withdrawn without purchasing an annuity.
Note: Full withdrawals are permitted only after the subscriber turns 18. This lock-in period, along with potential constraints on retirement or emergency funds, should be carefully considered.
6. Low-Cost & Transparency
- Minimal Fund Management Charges: Around 0.01% of assets under management.
- Regular Portfolio Updates: Online statements and real-time tracking.
- Portable Account: Accessible across jobs and locations in India.
7. Annuity & Nomination Facility
- Mandatory Annuity (40% Corpus at Maturity): Choose from options like Life Annuity, Joint Life Annuity, or Annuity with Return of Purchase Price.
- Nomination: Guardians can nominate a beneficiary to manage the account in case of their demise.
Comparison with Other Child Investment Options
| Feature | NPS Vatsalya Scheme | Child ULIPs | Mutual Funds (Child Plans) | Fixed Deposits (FDs) | Sukanya Samriddhi Yojana (SSY) |
| Investment Type | Market-linked (Equity, Bonds, Govt Securities) | Market-linked + Insurance | Market-linked | Fixed-income | Fixed-income |
| Lock-in Period | Until 18 years (Partial withdrawals allowed) | Varies (typically 5-10 years) | Minimum lock-in of 5 years | Varies (1-10 years) | 21 years (Partial withdrawals allowed) |
| Returns Potential | High (Market-linked) | Moderate (High Charges) | High (Market-linked) | Low to Moderate | Moderate to High |
| Tax Benefits | 80C + 80CCD(1B) | 80C | No specific tax benefits | Interest taxable | Tax-free returns + 80C |
| Flexibility – in investment options | High (Customizable allocation) | Low (Limited by insurer) | High (Switchable funds) | Low (Fixed tenure) | Low (Rigid rules) |
| Annuity Requirement | 40% mandatory annuity purchase | No | No | No | No |
| Who Can Invest? | Any child (boy or girl) | Any child | Any child | Any child | Only for girl children |
Why Choose the NPS Vatsalya Scheme?
1. Power of Compounding
Even modest contributions can grow significantly over time, creating a strong financial safety net.
2. Customizable Investment Approach
Unlike rigid child plans, the NPS Vatsalya Scheme allows you to tailor investments through Active or Auto Choice strategies.
3. Attractive Tax Savings
Dual tax benefits under Section 80C and 80CCD(1B), providing more advantages than most child investment options.
4. Low-Cost, High-Transparency
Minimal fund management charges ensure more of your money stays invested.
5. Secure, Government-Regulated Scheme
Being regulated by PFRDA, it offers reliability and long-term security.
Key Considerations Before Investing
Market Risks and Flexibility
- Equity exposure in NPS can lead to market fluctuations.
- However, subscribers have the flexibility to adjust asset allocation to manage risk effectively.
Annuity Requirement at Maturity
- Upon maturity, 40% of the corpus must be used for annuity purchase, ensuring a regular pension post-retirement.
Financial Responsibility Upon Adulthood
As the child assumes financial independence, guiding them in investment management becomes essential. Key areas of focus include:
- Risk assessment and understanding market dynamics.
- Diversification strategies to reduce risk exposure.
- Long-term financial planning to build wealth.
- Investment alignment with personal financial goals.
Impact on Parental Financial Goals
Parents investing in a child’s name should carefully evaluate:
- Limited withdrawal flexibility, which could impact their own financial goals.
- Potential opportunity costs, as NPS returns may be lower than other flexible investment avenues.
Proper planning is crucial to ensure a child’s financial future while maintaining parental financial security.(Read: 20 Hidden Risks to Your Retirement Plan)
Final Thoughts
The NPS Vatsalya Scheme offers a disciplined, flexible, and tax-efficient way to build wealth for your child’s future. However, its long lock-in period and lack of tax benefits compared to other investment options like PPF, Sukanya Samriddhi schemes, or Child Mutual Fund plans make it less attractive.
If you prioritize flexibility and cash flow in your child’s financial planning, this scheme may not be the ideal choice. You could consider creating a diversified portfolio for your child that allows for better asset allocation while maintaining flexibility and liquidity.
Remember, taking a small step today can pave the way for your child’s financial success in the future!
