NPS Vatsalya: Is it the right choice for parents?

Unlike other financial products aimed at short-term goals like education or marriage, NPS Vatsalya focusses solely on long-term retirement savings for the child.

In Short

• Minimum contribution is Rs 1,000 per year, no upper limit
• Offers tax benefits and flexibility in investment choices
• Not suitable for short-term goals like education or marriage

NPS Vatsalya is a new scheme under the National Pension System (NPS), which was launched by Union Finance Minister Nirmala Sitharaman, designed specifically to help parents build a retirement fund for their child from birth.

Unlike other financial products aimed at short-term goals like education or marriage, NPS Vatsalya focuses solely on long-term retirement savings for the child.

The key appeal of NPS Vatsalya lies in its long lock-in period. This allows the contributions to be invested for decades, giving the money time to grow through the power of compounding.

By the time the child reaches retirement age, the fund should have grown significantly, providing financial security in their later years.

How does NPS Vatsalya work?

Parents or guardians can start an NPS Vatsalya account with a minimum contribution of Rs 1,000 per year, with no upper limit on how much they can invest. The scheme is aimed at supporting long-term financial planning for the child’s retirement.

It offers tax benefits and requires a disciplined approach to savings, as the funds are locked in until the child turns 18, at which point the account transitions into a regular NPS Tier I account.

Kurian Jose, CEO of Tata Pension Management, highlighted these points, and said, "NPS Vatsalya offers a disciplined retirement fund that benefits from the power of compounding. With its tax benefits and long-term focus, it is a great tool for parents to secure their child’s future."

Benefits of NPS Vatsalya

One of the major advantages of NPS Vatsalya is its long-term nature, which ensures that the funds remain invested for several decades. This helps to maximise the benefits of compounding, where the returns on the investment themselves generate more returns over time.

Another benefit is the flexibility in investment choices. Parents can choose how much of the money is invested in equities versus debt, allowing them to adjust based on their risk tolerance and financial goals. The scheme also ensures that the account transitions seamlessly into a regular NPS Tier I account once the child turns 18.

Should parents invest in NPS Vatsalya?

For parents looking for a long-term, low-risk investment for their child’s retirement, NPS Vatsalya is a good choice.

"The scheme also allows guardians to customise their investment approach based on their risk tolerance and financial goals, ensuring continued financial security as the account seamlessly transitions to NPS Tier I once the child reaches 18. Unlike mutual funds, it’s straightforward and carries minimal risk," said CA Niresh Maheshwari, Director of Wealth Wisdom India Pvt Ltd.

He further added that there are no tax implications when the account converts to a regular NPS at age 18, and it follows the same tax rules as NPS Tier I.

Are there better alternatives?

If the primary goal is to save for a child’s education or other major life events, NPS Vatsalya may not be the best fit. The withdrawal flexibility under this scheme is limited. Only 25% of the corpus can be withdrawn after a three-year lock-in period, and that too only for specific reasons like education or medical emergencies.

Maheshwari explained the limitations, and said, "Parents looking for goal-based investments for their child may prefer options like Sukanya Samriddhi Yojana for girls, Public Provident Fund (PPF), or debt mutual funds, which provide more liquidity. These options might be more appropriate for saving towards education or marriage."

Other investment options include real estate, systematic investment plans (SIPs), or even higher-risk investments like stocks or IPOs. These can offer higher returns over the long term, depending on market conditions.