Invest in NPS Vatsalya if you have a long horizon and can forgo liquidity

The scheme may not suit investors who want liquidity, are targeting short- to medium-term goals, or are uncomfortable with equity volatility

The Pension Fund Regulatory and Development Authority (PFRDA) has issued the NPS Vatsalya Scheme Guidelines, 2025, for the National Pension System (NPS) Vatsalya for minors. Announced in the Union Budget 2024–25 and launched in September 2024, the scheme lets parents and guardians build long-term savings for children, with an option to shift to the regular NPS once the child becomes an adult.

 

“The NPS Vatsalya scheme aims to promote early saving and long-term financial planning among minors. Guardians can invest on their behalf, with scheme choices similar to those available under the NPS Tier I plan,” says Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat.

Asset allocation and fund choices

Rahul Bhagat, chief executive officer (CEO), DSP Pension Fund Managers, says regulators have created this new scheme under which fund managers can curate portfolios within broad guidelines.

 

“The indicative asset allocation includes equity 50–75 per cent, government securities 15–20 per cent, debt instruments 10–30 per cent, and money market up to 10 per cent,” says Bhagat.

 

NPS Vatsalya works similar to the regular NPS.

 

“The guardian can choose from any of the 10 PFRDA-registered pension fund houses to manage the account. The fund or asset allocation choices (auto or active) and the selected allocations are recorded with the central recordkeeping agency (CRA) and followed according to PFRDA’s investment guidelines,” says Vishwajeet Goel, head, Pensionbazaar.com.

Rules for partial withdrawals until 18

Goel says partial withdrawals are allowed for specific needs such as the subscriber’s higher education, treatment for specified illnesses, or disability of more than 75 per cent. The account must have been active for at least three years from the date of opening. The subscriber can withdraw up to 25 per cent of total contributions (excluding investment returns). The rules allow up to two partial withdrawals before the subscriber turns 18.

Exit options after turning 18

After the subscriber turns 18, NPS Vatsalya enters a three-year transition period that requires fresh know your customer (KYC) compliance and updated nominee details. “During this period, the subscriber can migrate the full corpus to a standard NPS model, opt for a partial exit with an 80 per cent lump sum (ideal for higher education) and 20 per cent annuity, or—if the total corpus is ₹8 lakh or less—withdraw the entire amount as a lump sum,” says Goel.

Account treatment between 18 and 21

After the subscriber turns 18, they must complete fresh KYC and can make up to two additional partial withdrawals between ages 18 and 21. “If no choice is made by 21, the account automatically shifts to a high-equity NPS plan under regular exit rules, with KYC required for future access,” says Goel.

Provisions in case of death of subscriber or guardian

If a minor subscriber dies, the guardian, nominee, or legal heir can receive the full corpus. They can withdraw it or transfer it to their NPS account. If the guardian dies, a new guardian can register after completing KYC.

 

“If both parents die, a legal guardian can maintain the account with or without contributions. On turning 18, the subscriber may continue under NPS or exit according to the rules, ensuring the child’s savings remain protected,” says Goel.

Disciplined long-term savings

Starting early builds saving discipline and investment awareness. “You start a disciplined investment (for example, ₹1,000–₹5,000 monthly). Because you start when the child is very young, your small, steady contributions have 60 years to compound into a massive fortune,” says Vinayak Magotra, product head and founding team, Centricity WealthTech.

 

According to PFRDA guidelines, the scheme offers low-cost, market-linked returns with strong governance. “NPS has one of the lowest overall charge structures among long-term investment products in India, which helps enhance net returns,” says Kurian Jose, CEO, Tata Pension Management.

 

Jose says contributions qualify for deductions in the old tax regime under Section 80CCD(1) and Section 80CCD(1B) of the Income Tax Act, reducing taxable income for the parent or guardian.

 

Ranbheer Singh Dhariwal, group head, social security and welfare, Protean eGov Technologies, says the scheme’s transition to NPS and flexible contributions can help parents build a long-term pension base for children. “Cash gifts from relatives can be routed into this account, enabling one-time gifts to boost long-term savings,” says Magotra.

Drawbacks to consider

Funds remain largely locked in until 18, which can limit use for short-term needs or emergencies. “If the corpus is above ₹8 lakh at 18, only 80 per cent can be withdrawn; the rest must go into an annuity, limiting accessibility,” says Jose.

 

Dhariwal says returns are market-linked with no guarantees.

 

“Understanding asset allocation choices, annuity rules, and long-term planning may be a deterrent for some investors,” says Jose.

Who should go for this scheme?

The scheme may suit long-term savers. “Parents or guardians who want disciplined, long-term wealth creation and have a retirement mindset for their child may go for it,” says Jose.

 

“It works particularly well for investors who value structure, regulatory oversight, and continuity into the NPS ecosystem, and who are comfortable with limited liquidity in exchange for long-term financial security,” says Dhariwal.

 

The scheme may also suit tax-efficient investors. “Those aiming to leverage NPS tax deductions along with long-term investment through prudent asset allocation should opt for this scheme,” says Jose.

Who may want to avoid it

The scheme may not suit those who need high liquidity or wish to save for short- to medium-term goals. “Parents who prefer guaranteed returns, greater investment flexibility, or full lump-sum access at maturity may be better served by alternative savings instruments,” says Dhariwal.

 

Jose add that those averse to equity or market volatility should consider safer fixed-income instruments.

 

(The writer is a Mumbai-based independent journalist)

 

Dos and don’ts for investors

 

Dos:

• Start early and contribute regularly
• Treat it as a long-term pension plan for your child
• Plan transition to regular NPS at adulthood and update KYC

 

Don’ts:

• Don’t rely on it for education or emergencies
• Don’t contribute if you have liquidity needs
• Don’t ignore annuity rules at exit