Is NPS Vatsalya a Worthwhile Proposition to Plan for Your Child’s Future? Know Here

Under NPS Vatsalya, parents can now contribute to the National Pension System (NPS) on behalf of their children, providing a structured and disciplined approach to long-term savings. The scheme aims to build a solid financial foundation for minors, ensuring they have a safety net as they grow older. But is NPS Vatsalya the right choice for your child's financial future?

In this article, we delve into the scheme's key features, benefits, and potential drawbacks, helping you make an informed decision about whether this new offering aligns with your family's long-term financial goals.

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What Is NPS Vatsalya Scheme?

Introduced in the 2024 Budget, the NPS Vatsalya Scheme is a new pension plan aimed at securing children's financial futures. This scheme allows parents and guardians to open an NPS account for their children and contribute regularly, either monthly or yearly, until the child turns 18. Once the child reaches adulthood, the account can be effortlessly converted into a regular NPS account.

The NPS Vatsalya Scheme is available to all parents and guardians, including Indian citizens, NRIs, and OCIs. This means that no matter where you reside, you can invest in this scheme to secure your child's future. The Central Government is expected to provide application details for the NPS Vatsalya Scheme on the official eNPS website.

Benefits of the NPS Vatsalya Scheme:

1. Long-Term Growth: Starting the account while your child is a minor allows the savings to grow significantly by the time they retire.

2. Early Savings Habits: The scheme encourages children to develop healthy savings habits early in life.

3. Easy Account Conversion: At age 18, the NPS Vatsalya account can be smoothly converted into a regular NPS account, which can be maintained for life to build a robust retirement fund.

4. Financial Responsibility: The scheme helps instil a sense of financial responsibility and highlights the importance of saving as children transition into adulthood.

A parent or guardian can set up an NPS account for a minor and make regular contributions, with the account automatically converting to a standard NPS account once the minor reaches adulthood. Essentially, this scheme is designed to save for the child's retirement. Beginning contributions when the child is young can help build a substantial financial foundation by the time they enter the workforce. However, the scheme has garnered mixed reactions.

The NPS participation in the corporate sector is currently only at 10-15 per cent. While it provides significant long-term benefits, the strict lock-in period and restrictions on withdrawals may reduce its attractiveness, particularly considering the rising costs of education. Some financial experts believe the scheme could become more appealing if it allowed withdrawals for specific purposes, such as funding education.

Currently, the NPS allows for a partial withdrawal of 25 per cent of the contributions after three years of joining the scheme. Additionally, individuals can exit the NPS prematurely after five years, but only 20 per cent of the total corpus can be withdrawn tax-free, with the remaining amount required to be invested in an annuity scheme. If the corpus is below Rs 2.5 lakh, it can be withdrawn entirely upon early exit.

Given these conditions, it is evident that the NPS is not ideal for saving for higher education expenses. The partial withdrawal is based on the contributions, not the total corpus, and the premature withdrawal limit of 20 per cent of the corpus may result in an insufficient amount.

Many individuals struggle to allocate savings to retirement schemes due to high living costs and immediate financial goals. Expecting people, who may not be prioritising their own retirement savings, to plan for their children's retirement might seem unrealistic.

What people really need is a way to direct their savings into solid investment options that can cover the rising costs of higher education. Even the most financially savvy investors typically don't consider saving for their child's retirement.

While the NPS Vatsalya Scheme is designed with the intention of securing a child's retirement, it may not align with the more immediate goals that most parents have for their children. The primary focus for many parents is to ensure that their children receive a quality education, which serves as a foundation for a successful career and a stable income.

Education and, subsequently, wedding expenses are significant milestones that parents are more inclined to plan and save for, as these directly impact the child's immediate future and long-term well-being.

Once a child is well-educated and capable of earning a living, they are better positioned to plan for their retirement needs independently. Therefore, expecting parents to prioritise their child's retirement over more immediate and essential goals like education is not practical.

The NPS Vatsalya Scheme, though well-intentioned, might not fully resonate with parents who are more focused on ensuring that their children have the tools they need to succeed in life. By providing a strong educational foundation, parents empower their children to secure their own financial futures, including retirement planning, at the appropriate time in their adult lives.

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Hiral Bhuta is a Investment Consultant & Principal Officer. She is a seasoned professional in the financial services industry, currently serving as an Investment Advisor and Financial Planner at PersonalFN. With her expertise, she plays a pivotal role as the Principal Officer appointed under SEBI's amended IA Regulation. Hiral holds distinguished certifications such as Certified Financial Planner (CFP) and NISM XA & XB, complemented by a post-graduate degree in commerce (M. Com). Her primary areas of focus encompass financial planning, investment advisory, and wealth management, where she leverages her knowledge and skills to provide tailored solutions to clients. With a cumulative experience spanning five years, Hiral brings a wealth of expertise and insight to her role at PersonalFN, ensuring clients receive expert guidance and support in navigating their financial goals.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.