Introduction
The Union Minister for Finance and Corporate Affairs Ms. Nirmala Sitharaman announced the National Pension System Vatsalya (NPS Vatsalya) scheme to enhance long-term financial security and support early saving practices. This innovative pension programme, primarily aimed at children, was unveiled on July 23, 2024, as part of the Union Budget 2024–25. It embodies a turning point in financial planning and formulates a new standard for responsible financial management from a young age.
The Pension Fund Regulatory and Development Authority (PFRDA), which oversees and handles this creative saving-cum-pension plan, has furthered the government's pursuits to improve financial security and prepare for future generations. Along with securing the future of its young subscribers, NPS Vatsalya’s emphasis on cross-generational justice underscores the importance of fostering a culture of saving from a young age.
Need for the Policy
The features of NPS are as follows:
- Account opening and beneficiary: Parents or guardians can open an NPS Vatsalya account for minor children, with the child being the sole beneficiary. It also has feasible withdrawals.
- Account management: The guardian can manage the account solely for the minor’s benefit until the latter turns 18 years of age. After turning 18 years of age, the account holder can continue using the account and access the compiled corpus.
- PRAN assignment: The Central Recordkeeping Agency (CRA) will issue a unique Pension Retirement Account Number (PRAN) in the name of the minor.
- Account transition: On turning 18 years of age, the NPS Vatsalya account will remain active and be shifted to the NPS Tier-1 Account under the All-Citizen Model.
- KYC process: The account holder will have to complete a new KYC process within three months of turning 18 years of age.
- Contributions and enrolment: The minimum annual contribution to the NPS Vatsalya account is Rs. 1,000 (US$ 11.85), with no upper limit. The initial enrolment contribution is also Rs. 1,000 (US$ 11.85).
Eligibility
The eligibility criteria are:
- The scheme is available to all Indian citizens below the age of 18. This includes all minor children who are residents of India.
- Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) under 18 years of age can also benefit from the scheme.
- Parents or legal guardians have the permission to open and manage the NPS Vatsalya account on behalf of the minor.
- The Nominees for the account will be either the parent or a guardian, ensuring that they are the point-of-contact for all account related concerns until the child turns 18.
- While the parents or guardians manage the account, the child is the sole beneficiary of the NPS Vatsalya account. All contributions, returns and benefits accrued from the scheme will be for the child’s future financial security.
- The management rights will only be transferred after the completion of the required KYC process, post completion of 18 years of the beneficiary.
Documents Needed
The following documents are necessary to initiate an NPS Vatsalya account:
- Proof of date of birth of the minor: This can be fulfilled through a Birth Certificate, School Leaving Certificate, Matriculation Certificate, Permanent Account Number (PAN), or Passport.
- KYC of the guardian: The guardian must entrust proof of identity and address, such as Aadhaar, Driving License, Passport, Voter ID card, National Rural Employment Guarantee Act (NREGA) Job Card, or National Population Register documents.
- PAN of the guardian or Form 60 declaration, as per Rule 114B.
- The minor's sole or joint NRE/NRO bank account, if the guardian is an OCI or NRI.
Contribution and Investment Choices
The NPS Vatsalya scheme allows flexible contributions to the account:
- Account Opening Contribution: To open an account, one must deposit at least Rs. 1,000 (US$ 11.85), with no upper limit.
- Subsequent Contributions: There is no upper limit to the total amount that can be contributed, although a minimum of Rs. 1,000 (US$ 11.85) must be made annually.
- To manage investments, guardians can choose from several pension funds that are registered with the Pension Fund Regulatory and Development Authority (PFRDA).
- There are three main options for investments:
- The Moderate Life Cycle Fund (LC-50), which devotes 50% of the investment to equities, is the default option.
- Auto Choice: Depending on the level of risk tolerance, guardians can choose from three Lifecycle Funds under the Auto Choice option. For investors with greater risk tolerance, the Aggressive LC-75 allocates up to 75% of the investment to equity. The Moderate LC-50 provides a balanced strategy by allocating 50% in equity. With 25% equity allocation, the Conservative LC-25 minimizes risk while offering growth potential for investors looking for a more cautious approach.
- Active Choice: Guardians who choose the Active Choice option have complete authority over how they divide their money across four asset classes. They can invest up to 100% in government securities for safety, up to 75% in equities for greater growth potential, up to 5% in alternative assets for diversification, and up to 100% in corporate debt for stability. With this choice, guardians can modify the investment plan to suit their risk tolerance and financial objectives.
Withdrawal and Exit Rules
Partial withdrawal is permitted under the NPS Vatsalya Scheme prior to the child turning 18. The following requirements must be met to partially withdraw funds from the NPS Vatsalya account:
- Parents or guardians may withdraw 3 years after joining the NPS.
- They can take out up to 25% of their contribution.
- The withdrawal option is available just three times until the child turns 18 years of age.
- According to the PFRDA, they may withdraw for educational purposes, disabilities over 75%, treatment of specific illnesses, etc.
On turning 18, the account holder can switch from the NPS Vatsalya Scheme to a conventional NPS account, which they can manage on their own. However, within three months of turning 18, the beneficiary must complete a new KYC. The amount of the NPS Vatsalya contribution that has been accrued will be moved to the regular NPS account.
On becoming an adult, the beneficiary has the option to leave the NPS Vatsalya account instead of converting it to a regular NPS account. The following requirements must be met to withdraw the NPS Vatsalya account balance upon exit:
- At least 80% of the accumulated corpus must be reinvested in an annuity plan and the remaining 20% may be taken out.
- The full amount may be taken out as a lump sum if the total corpus is less than Rs. 2.5 lakh (US$ 2,962).
The following are the guidelines for the NPS Vatsalya Scheme in the event of an untimely death:
- If the beneficiary (a minor kid) passes away, the nominee, who is the guardian, will receive the entire corpus back.
- In the event of the guardian's death, a new KYC should be obtained to register a new guardian under the programme.
- If both parents pass away, the kid's legal guardian may continue the programme without paying any contribution until the child turns 18 years old.
Union Budget 2025-26
- The same tax benefits available for NPS contributions under Section 80CCD(1B) will now apply to contributions made to NPS Vatsalya accounts, allowing an additional Rs. 50,000 (US$ 582.75) deductions over Rs. 1.5 lakh (US$ 1,748.26) limit.
Conclusion
The NPS Vatsalya programme is a big step in the right direction for creating financial stability and encouraging savings from an early age. The goal of the government's special pension plan for minors is to help them learn how to save responsibly and take advantage of the compound interest to build wealth over time. NPS Vatsalya gives guardians the flexibility to customise their investment plans based on their risk tolerance and financial objectives by providing a variety of investment options and flexible contribution options. The account continues to offer strong financial protection and investment options even after it smoothly switches to the NPS Tier-I model when the minor turns 18. This programme establishes a standard for all-encompassing financial well-being across generations and demonstrates the government's dedication to improving financial planning and guaranteeing a respectable future for all residents.
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