As part of the National Pension System (NPS), Nirmala Sitharaman introduced the NPS Vatsalya Scheme in July 2024. It helps parents and guardians make long-term financial plans for their children, even while they are minors. They are able to start saving early for their child's future, especially for retirement.
NPS Vatsalya overview
A legal guardian can open an NPS Vatsalya account on behalf of a minor (under 18 years of age). When the child turns 18, it can be converted into a regular NPS account.
NPS Vatsalya's Key Features
- From the time their child is an infant, parents can start saving for their child's future.
- A minimum contribution of $1,000 per year is required, with no upper limit on contributions.
- As interest is earned on both the initial amount as well as the accumulated interest, the scheme benefits from compounding.
Contributions that are flexible
Its flexibility allows parents to invest at a pace that suits their financial situation, while still providing a chance for significant growth over time.
Options for investing
There are different investment strategies available to parents:
The Moderate Life Cycle Fund (LC-50) invests 50% in equity (stocks) and 50% in other assets.
A parent can choose from the following options based on how much risk they are willing to take:
- An aggressive LC-75 (75% equity)
- A moderate LC-50 (50% equity)
- A conservative LC-25 (25% equity)
Parents can actively choose how to allocate their money across different types of investments, such as equity, corporate debt, government bonds, and alternative assets.
Rules for partial withdrawals
A parent can withdraw up to 25% of the total amount saved after three years for specific needs, such as education and medical expenses. This withdrawal can be made up to three times before the child turns 18.
Options for maturity and withdrawal
Savings can either be withdrawn or continued once a child turns 18. Withdrawal options include:
Unless the total savings amount is more than 2.5 lakhs, the entire amount can be withdrawn as a lump sum.
Upon reaching the threshold of 2.5 lakh, parents may withdraw 20%, and the remaining 80% must be used to purchase an annuity, which will provide future income.
As soon as the child turns 18, the account automatically becomes a regular NPS Tier I account (All Citizen), and the child must complete a new Know Your Customer (KYC) process.
As a result of compounding growth and a variety of investment options, the NPS Vatsalya scheme offers parents a flexible and effective way to start saving for their child's long-term future. In addition, it allows withdrawal flexibility for important expenses such as education, allowing the scheme to adapt to both immediate and long-term financial needs.
