NEW DELHI: In an era where financial planning is more crucial than ever, the government has taken a significant step toward securing the financial future of our youngest citizens with the launch of the NPS Vatsalaya scheme.
Designed specifically for children below 18 years of age, this pension scheme aims to instil a culture of saving and investment from an early age. By providing a structured framework for long-term wealth accumulation, NPS Vatsalaya not only offers parents a powerful tool to safeguard their children’s financial well-being but also promotes the importance of financial literacy among the next generation.
Key features
This scheme will be regulated and overseen by the Pension Fund Regulatory and Development Authority of India (PFRDA). With this scheme, parents have the option to invest a minimum of R1,000 every year, with no maximum investment limit. Parents will manage the account until the child turns 18, at which point the account will be transferred into the child’s name.
The minor will be the sole beneficiary of the scheme. According to Kurian Jose, CEO, Tata Pension Management, by encouraging early investment and providing a structured savings plan, NPS Vatsalya aims to build a robust financial foundation for young individuals. “This innovative approach not only ensures that children receive the benefits of disciplined saving and compounding over time but also fosters a sense of financial responsibility from an early age,” he says.
Exit options
After a lock-in period of three years, guardians can withdraw up to 25% of their contributions, which can be done a maximum of three times. This feature is particularly beneficial for addressing significant life events such as education expenses, specified illnesses, or disabilities. Upon the child reaching the age of 18, the account transitions into an NPS Tier-I account, which is part of the All Citizen framework.
At this point, the rules regarding exit come into play. If the corpus exceeds R2.5 lakh, the individual will be required to use 80% of the corpus to purchase an annuity, while the remaining 20% can be withdrawn as a lump sum. Conversely, if the total corpus is R2.5 lakh or less, the entire amount can be withdrawn in one lump sum.
In the unfortunate event of the guardian’s death, the scheme ensures that the entire corpus is returned to the guardian’s designated beneficiary, providing peace of mind and financial security for the child’s future. In case of death of both parents, a legally appointed guardian can continue without making contributions until subscribers attain 18 years of age. In case of death of the minor, the entire corpus is returned to the guardian.
How to open an account
To open an NPS Vatsalaya account, parents can visit various Points of Presence (POPs), which include major banks, India Post, and Pension Funds, or they can use the online platform, e-NPS, for a more convenient option. When setting up the account, guardians need to provide specific documentation to fulfill the Know Your Customer (KYC) requirements.
For guardians who are Non-Resident Indians (NRIs), it’s essential to have an NRE or NRO bank account—either solo or joint—in the minor’s name to complete the registration process. The initial contribution to the NPS Vatsalaya scheme requires a minimum of R1,000, with no maximum limit imposed. For subsequent contributions, a minimum of R1,000 per year is required.
Investment options
Guardians have the flexibility to select from any of the pension fund managers registered with the PFRDA. When it comes to investment options, there are three choices available. In default choice, the money is invested in a Moderate Life Cycle Fund (LC-50), which allocates 50% in equity. In Auto Choice, guardians can opt for one of the Lifecycle Funds —Aggressive, which invests 75% in equity; Moderate with 50% in equity; or Conservative, which allocates 25% to equity.
In Active Choice, guardians can take a hands-on approach by deciding the allocation of funds across various asset classes, including up to 75% in equity, up to 100% in corporate debt, up to 100% in government securities, and up to 5% in alternative assets. While the scheme has been launched with a lot of fanfare, financial planners are not too excited about it. The corpus accumulated will be illiquid till the age of 60, says Lt Col (Retd) Rochak Bakshi, Founder and CEO of True North Financial Services.
“I feel that it will be better to invest for the child in pooled investments like mutual funds and then hand over the assets to the child on reaching the majority. These mutual funds can be aggressive and thus would have a better returns profile,” says Bakshi.