Planning To Invest In NPS Vatsalya?

NPS Vatsalya offers a disciplined investment avenue that parents can use to create intergenerational wealth by contributing even small sums.

The Pension Fund Regulatory and Development Authority (PFRDA) has issued the National Pension System (NPS) Vatsalya Scheme Guidelines, 2025.

This is a scheme that allows parents to save for their children's retirement. The scheme was announced in the Union Budget 2024-2025 and launched in September 2024.

"The NPS Vatsalya scheme aims to promote early saving and long-term financial planning among minors," says Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat.

Asset allocation and fund choices

The regulator allows pension fund managers to curate portfolios within broad guidelines.

"The indicative asset allocation is: 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 (the last option is included after the corpus exceeds Rs 5 crore)," says Rahul Bhagat, CEO, DSP Pension Fund Managers.

"The guardian can choose from any of the 10 PFRDA-registered pension fund houses to manage the account," says Vishwajeet Goel, head, Pensionbazaar.com.

The guardian can decide the asset allocation by choosing the pension fund manager whose allocation most closely matches their preference.

Rules for partial withdrawals until 18

Partial withdrawals are allowed for specific needs such as the subscriber's higher education, treatment of 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 the returns. The rules allow up to two partial withdrawals till the age of 18," says Bhagat.

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 an exit with 80 per cent lump sum (ideal for higher education) and 20 per cent annuity, or -- if the total corpus is Rs 8 lakh or less -- withdraw the entire amount as a lump sum," says Goel.

The subscriber can make up to two additional partial withdrawals between 18 and 21.

"If no option is exercised by the age of 21, the account automatically shifts to the high-risk (higher equity exposure) MSF (multiple scheme framework) variant of the same pension fund manager," says Bhagat.

Iyer adds that the account thereafter follows the rules applicable to a regular NPS Tier-I account.

If subscriber or guardian passes away

If a minor subscriber dies, the corpus can be claimed by the guardian, nominee or legal heir. They can withdraw the corpus or transfer the funds to their own NPS account.

If one parent dies, the other parent 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," says Goel.

Disciplined, long-term savings

NPS Vatsalya offers a disciplined investment avenue that parents can use to create intergenerational wealth by contributing even small sums.

"Since contributions begin when the child is very young, they have 60 years to compound into a massive fortune," says Vinayak Magotra, product head and founding team, Centricity WealthTech.

It is a low-cost product.

"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.

He adds that exposure to equities can significantly enhance long-term returns.

Contributions qualify for deductions in the old tax regime under sections 80CCD(1) and 80CCD(1B) of the Income Tax Act, reducing the parent or guardian's tax liability.

Parents get to save in a regulated product.

"The seamless continuity into the NPS ecosystem and flexibility in contributions make it an effective way for parents and guardians to build a secure, long-term pension foundation for their children," says Ranbheer Singh Dhariwal, group head, social security and welfare, Protean eGov Technologies.

Magotra suggests that cash gifts from relatives be routed into this account.

Low on liquidity

NPS Vatsalya comes with low liquidity. Funds remain largely locked in until 18, which can limit use for short-term needs or emergencies.

Compulsory annuitisation is another issue. Returns from annuities tend to be low and do not offer protection against inflation. They are also taxable at slab rate. Dhariwal points out that returns are market-linked with no guarantees.

The scheme's complexity could be a barrier for some. "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 suits long-term savers. "Parents or guardians who want to start long-term savings early for their children's retirement may go for it," says Iyer.

"It is appropriate for those who are comfortable with market-linked returns and limited liquidity in exchange for long-term financial security," says Dhariwal.

Jose adds that those aiming to leverage NPS tax deductions should opt for this scheme.

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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Aslam Hunani/Rediff