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The NPS Vatsalya Scheme empowers parents and guardians to secure their child’s future through long-term savings while also offering attractive tax benefits. Introduced on 18th September 2024, this scheme under the National Pension System (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), ensuring reliability and security. Let’s explore how this scheme helps save taxes up to Rs 2 Lakh while building a financial safety net for children.
What is NPS Vatsalya Scheme?
The NPS Vatsalya Scheme enables parents and guardians to open an NPS account for their children, fostering disciplined savings for a financially secure future. It is designed to provide long-term growth and tax-efficient savings. The contributions made under this scheme grow over time, securing the child’s financial independence after they reach adulthood.
Eligibility Criteria
To open an account under the NPS Vatsalya Scheme:
- Parents or Guardians can open the account on behalf of a minor child (below 18 years).
- The account can be maintained until the child attains 18 years of age, after which it converts into a regular NPS Account.
Contribution Limits
The scheme ensures flexible contributions, making it accessible to a wide range of families:
- Minimum Contribution: Rs. 1,000 per year.
- Maximum Contribution: There is no upper limit on contributions, allowing parents to save as much as they desire.
Tax Benefits Under NPS Vatsalya Scheme
One of the significant advantages of the NPS Vatsalya Scheme is its tax-saving potential. Contributions made to this scheme qualify for deductions under Section 80CCD of the Income Tax Act.
Scope of Section 80CCD
The scope of Section 80CCD has been expanded to benefit parents and guardians as follows:
- Deduction for Parents/Guardians: Under the old tax regime, parents or guardians can claim deductions for contributions made to the NPS Vatsalya account for up to 2 minor children.
- 80CCD(1B) Deduction: An additional deduction of Rs. 50,000 is available under Section 80CCD(1B), applicable cumulatively for both the parent’s account and the minor’s account.
- Overall Tax Saving: By combining deductions under Section 80CCD(1) and 80CCD(1B), taxpayers can save up to Rs. 2 Lakh annually.
Transition to Regular NPS Account
When the child reaches 18 years of age, the NPS Vatsalya account automatically transitions to a regular NPS account. Key points to note include:
- Full Control: The child gains full control over the account and can continue contributions independently.
- Continued Growth: The account retains its tax benefits and continues to grow with ongoing contributions.
KYC Requirement at 18 Years
- Upon reaching 18, a fresh KYC is required within 3 months.
- Documents Needed:
- Date of Birth Proof: (Birth Certificate, School Leaving Certificate, High School Certificate, PAN, or Passport)
- Guardian’s KYC: (Identity and Address Proof – Aadhaar, Driving License, Passport, Voter ID, NREGA Job Card, or National Population Register)
- For NRI Guardians: NRE/NRO Bank Account (Solo or Joint) of the minor is required.
Withdrawal Conditions Under NPS Vatsalya Scheme
Before the Child Turns 18
Partial withdrawals are allowed under the following conditions:
- Lock-In Period: Contributions must remain in the account for at least 3 years before withdrawal.
- Withdrawal Limit: Up to 25% of the contribution can be withdrawn for specific purposes such as education, specified illness, or disability.
- Frequency: A maximum of 3 withdrawals is allowed before the child reaches 18.
After the Child Turns 18
Upon turning 18, withdrawal conditions vary based on the accumulated corpus:
- If Accumulated Corpus is ≥ Rs. 2.5 Lakh:
- 80% of the balance must be used to purchase an annuity, ensuring regular income post-retirement.
- 20% can be withdrawn as a lump sum.
- If Accumulated Corpus is < Rs. 2.5 Lakh:
- The entire balance can be withdrawn as a lump sum.
Provisions in Case of Death
Death of the Minor
- If the minor passes away, the entire accumulated corpus is returned to the guardian.
Death of the Guardian
- Change of Guardian: A new guardian can be appointed through fresh KYC.
- Both Parents Deceased: A legally appointed guardian can continue the account with or without making further contributions.
- Once the child reaches 18 years, they can choose to continue or exit the scheme.
How to Open NPS Vatsalya Account?
Opening an account under the NPS Vatsalya Scheme is straightforward:
- Visit the nearest NPS Point of Presence (PoP) or register online on the NPS portal.
- Provide the required documents, including proof of minor’s age and guardian’s KYC.
- Complete the application form and make the first contribution of at least Rs. 1,000.
FAQs About NPS Vatsalya Scheme
1. Who can open an NPS Vatsalya Account?
Parents or guardians can open the account for a child below 18 years.
2. What is the Tax Benefit under Section 80CCD?
Section 80CCD allows tax deductions on contributions made to NPS accounts, including NPS Vatsalya. Parents can claim deductions for contributions made to the child’s account up to Rs. 50,000 under 80CCD(1B).
3. What happens after the child turns 18?
The NPS Vatsalya Account transitions into a regular NPS account, granting the child full control over contributions and withdrawals.
4. Can withdrawals be made before the child turns 18?
Yes, partial withdrawals (up to 25%) are allowed after a 3-year lock-in period, for education, illness, or disability.
5. Is there a limit on contributions?
No, there is no upper limit on contributions. The minimum annual contribution is Rs. 1,000.
