NPS Vatsalya Scheme

September 18, 2024

Union Finance Minister Nirmala Sitharaman introduced the NPS Vatsalya Scheme in July 2024 as part of the National Pension System (NPS). It aims to help parents and guardians make long-term financial plans for their children, even while they are still minors. This allows them to start saving early for their child’s future, particularly for retirement.

Overview of NPS Vatsalya

Any Indian citizen, including Non-Resident Indians (NRIs), can open an NPS Vatsalya account. The account is opened by a legal guardian on behalf of a minor (child under 18 years). When the child turns 18, the account can be converted into a regular NPS account.

Key Features of NPS Vatsalya

Start Saving Early: Parents can start saving for their child’s future from the time they are infants.

Minimum Contribution: The minimum amount to invest is ₹1,000 per year, with no upper limit on how much can be contributed.

Compounding Benefit: The scheme benefits from compounding, meaning the investment can grow over time as interest is earned on both the initial amount and the accumulated interest.

Flexible Contributions

Parents can choose to contribute as little as ₹500 per month or ₹6,000 per year. This flexibility allows families to invest at a pace that suits their financial situation, while still providing a chance for significant growth over time.

Investment Options

Parents have different investment strategies to choose from:

Default Choice: The Moderate Life Cycle Fund (LC-50), which invests 50% in equity (stocks) and 50% in other assets.

Auto Choice: Based on how much risk parents are willing to take, they can choose:

Aggressive LC-75 (75% in equity)
Moderate LC-50 (50% in equity)
Conservative LC-25 (25% in equity)

Active Choice: Parents can actively decide how to allocate their money across different types of investments, such as equity, corporate debt, government bonds, and alternative assets.

Partial Withdrawal Rules

After three years, parents can make partial withdrawals for specific needs, like education or medical expenses. They can withdraw up to 25% of the total amount saved, and these withdrawals can be done up to three times before the child turns 18.

Maturity and Withdrawal Options

When the child turns 18, parents can either withdraw the savings or continue with the scheme. The withdrawal options are:

If the total savings are ₹2.5 lakh or less: The entire amount can be withdrawn as a lump sum.

If the total savings are more than ₹2.5 lakh: Parents can withdraw 20% of the amount, and the remaining 80% must be used to buy an annuity, whiach provides regular income in the future.

If the account is not closed when the child turns 18, it automatically becomes a regular NPS Tier I account (All Citizen), and the child must complete a new Know Your Customer (KYC) process within three months.

The NPS Vatsalya scheme offers parents a flexible and effective way to start saving for their child’s long-term future, taking advantage of compounding growth and a range of investment options. It also offers withdrawal flexibility for important needs like education, ensuring the scheme adapts to both immediate and long-term financial goals.

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