NPS Vatsalya becomes 'flexible investment' option: Expert explains changes

Pension funds regulator relaxes withdrawal and exit norms, allowing parents to access funds for education and medical needs while maintaining long-term savings

The pension regulator has eased exit and withdrawal rules for the NPS Vatsalya scheme, giving parents flexibility in investing for their children’s future. The move aims to address financial needs that arise as a child grows, particularly for higher education and medical expenses.

 

NPS Vatsalya, which was announced in the Union Budget for 2024–25, allows parents or guardians to open a pension account for a minor with a minimum annual contribution of Rs 250 and no upper limit. The scheme is meant to promote early retirement savings but its lock-in rules had raised concerns among parents.

 

What has changed in the rules

 

Under a revised framework, the Pension Fund Regulatory and Development Authority (PFRDA) has relaxed both partial withdrawal and exit norms:

 

 

Partial withdrawals are now allowed three years after an account’s opening.

 

Up to 25 per cent of the subscriber’s own contributions can be withdrawn for education, medical treatment, or specified disabilities.

 

Withdrawals can be made twice before the child turns 18 and twice between ages 18 and 21, subject to conditions.

 

Exit rules have also been liberalised. On attaining majority, subscribers can either shift the corpus to a regular NPS Tier-I account or exit the scheme.

 

Up to 80 per cent of the corpus can be withdrawn as a lump sum, with at least 20 per cent required to be used for annuity purchase.

 

Full withdrawal is permitted if the total corpus is Rs 8 lakh or less, improving liquidity for smaller savers.

 

Why this matters for parents

 

The new framework addresses a key concern for households, said Vishwajeet Goel, head of Pensionbazaar.com. “By allowing flexible withdrawals for education and critical needs precisely when they are needed most, the PFRDA has addressed one of the most capital-intensive phases for any household, when a child typically pursues higher education,” he said.

 

Goel noted that the ability to withdraw up to 80 per cent of the corpus between ages 18 and 21 (fully if the corpus is below Rs 8 lakh) strengthens financial choice. It makes NPS Vatsalya a practical product for parents who want both long-term savings discipline and access to funds when required.

 

How it fits into financial planning

 

Experts say the changes position NPS Vatsalya as a hybrid planning tool. While it retains its long-term retirement focus, the scheme now also supports near-term goals such as education or medical needs. Goel added that the low minimum contribution and potential tax deductions on contributions further strengthen its appeal, especially for middle-income families.

 

With these relaxations, NPS Vatsalya is likely to see wider adoption, particularly among parents seeking a structured yet flexible way to save for their children’s future.