Following up on the Budget announcement, the government has launched the NPS Vatsalya, which stands to be an extension of the existing NPS system. While NPS has been adding subscribers at a brisk pace and could be quoted as a technically successful model, the same infrastructure is being extended beyond the working population, to the minors.

NPS Vatsalya is a contributory pension scheme, whereby parents/ guardians can create and initiate retirement savings for their minor children. Akin to NPS, NPS Vatsalya is also regulated and administered by PFRDA.

Investment mechanism

NPS Vatsalya operates in similar lines as the regular NPS, in terms of minimum annual contribution and investment choices provided.

The scheme calls for a minimum contribution of ₹1,000 per annum and there is no ceiling on the maximum contribution, and an option to choose the Pension Fund is extended to the guardian.

With regard to investment, the default choice is ‘Moderate Life Cycle (LC) Fund’ which allocates 50 per cent to equity, while other set options are ‘Aggressive LC Fund’ providing an equity exposure of 75 per cent and ‘Conservative LC Fund’ providing 25 per cent equity exposure. The guardian can also opt for an active investment mode where the exposure to different asset classes can be tailor-made, however restricting maximum equity exposure to 75 per cent and alternate assets to 5 per cent, while 100 per cent allocation can be made towards corporate debt and government securities.

The investments, irrespective of the quantum, will be witness to the wonder of compounding and will be a good steppingstone for the children to continue on.

Exits/Withdrawals

NPS Vatsalya allows for a partial withdrawal of upto 25 per cent of contribution after a lock-in period of three years, for education, specified illness and disability, on declaration basis, for a maximum of three times till the subscriber attains 18 years of age.

On the subscriber reaching 18 years of age, where the accumulated corpus is less than ₹2.5 lakh, the scheme provides an option to exit by withdrawing the entire balance in lump-sum fashion. Where the accumulated corpus is greater than or equal to ₹2.5 lakh, it is mandated to purchase an annuity utilising at least 80 per cent of the balance, while the remaining balance can be withdrawn in lump-sum, if chosen to exit.

Otherwise, if chosen to continue, the NPS account will be transitioned into a NPS tier-1 account (all citizen model) and all the features, benefits and exit norms of the NPS tier-1 for All Citizen Model will apply. However, KYC of the subscriber is to be updated within three months of attaining 18 years of age.

In the unfortunate event of death of the subscriber, the accumulated corpus would be returned to the parent/ guardian. In case of death of both parents, the legally-appointed guardian can continue with or without making contributions to the account. In the case of death of the guardian, another guardian is to be registered.

Our take

While alternatives exist in the form of Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY), none of them are market-linked investments. And considering the long-term compounding machine that equity is, NPS Vatsalya is a relatively riskier but promising scheme, though not as tax efficient — its alternatives qualify for exemption while Vatsalya doesn’t.

Apart from tax considerations, the concept of allowing the minor to convert the account to regular NPS tier-1 after attaining 18 gives a long leeway to generating a substantial corpus. If, for example, a parent starts the NPS Vatsalya at age 3 for the child and after turning 18, the child decides to continue the account till 60, there is a staggering time period of 57 years for the corpus to grow.

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