Budget 2024 has created a new investment avenue: NPS Vatsalya scheme

When the minor reaches adulthood, their account will automatically convert to a regular NPS account.

The Union Budget 2024 has created a new investment avenue in the form of the 'NPS Vatsalya', designed to support long-term savings for minors. It enables parents and guardians to invest on behalf of minors, encouraging early financial planning.

Key features:

• Early Start: Parents can start saving for their child's retirement as early as infancy.
• Long-Term Benefits: The power of compounding can significantly enhance returns over a long investment horizon.
• Account Conversion: Upon reaching adulthood, the child's account will automatically transition into a regular NPS account.
• Minimum Investment: Parents can start with a modest monthly contribution of Rs. 500 or an annual contribution of Rs. 6,000.

"Essentially, it's an early starter NPS option whereby parents can start an NPS account for their minor children and when the children turn 18 years old, the account gets converted into regular NPS. NPS also got a boost by allowing higher employer contributions. While changes like this don't get much mention compared to the headlines of the budget, they will eventually have a greater impact on lives," said Dhirendra Kumar of Value Research.

Who is eligible for NPS Vatsalya?

All parents and guardians, whether Indian citizens, NRIs, or OCIs, are eligible to open an NPS Vatsalya account for their minor children. 

What are the benefits? ClearTax explains:

• The NPS Vatsalya Scheme will promote savings habits in children because when the children turn 18, the account can be converted to a standard NPS scheme. 
• The NPS scheme offers portability, i.e., it allows a person to change jobs without any impact on the NPS account. 
• The NPS Vatsalya account is a good retirement fund option since contributions to the account begin when the child is a minor. Thus, a huge amount will be accumulated at the time of the child’s retirement. At the time of retirement, one can withdraw 60% of the accumulated amount in the NPS account. 
•  A part of the corpus can be taken out tax-free upon retirement.

According to Kumar, the schem is a market-linked investment. So far the government has always encouraged savings to be parked in fixed income. "Here, it is almost like a government-sponsored low-cost market-linked children's plan. And here the investment will become the child's once they turn into a major. So, it could be a child's education fund, it could be a child's wedding fund, or any purpose. All in all, this is an introduction of a new product category in the framework of NPS because NPS is a proven design now. It's low-cost, it's  market-linked and works perfectly. What's more, it's very well-regulated," said Kumar.

But is it ideal for higher education? 

The NPS Vatsalya scheme, while beneficial for long-term retirement planning, falls short as a dedicated savings instrument for higher education.

The current NPS structure, including Vatsalya, primarily focuses on retirement savings. The restricted withdrawal options, such as partial withdrawal after three years and a maximum of 20% lump sum withdrawal after five years, limit its utility for education expenses.

 Given the rising costs of higher education, the amount accessible through permissible withdrawals might not be sufficient to cover substantial educational expenses.

 The NPS is designed for long-term wealth creation and retirement planning, not short-term goals like higher education.