Explainer: What is the purpose of new pension scheme NPS Vatsalya?

Designed to encourage parents to start early savings and investment for minors, the finance minister Nirmala Sitharaman announced the introduction of a new scheme called the NPS Vatsalya during the presentation of the budget in Parliament today (July 23).

So, what is this scheme all about? And, what does it propose to achieve? Here are the details:

What is NPS Vatsalya?

It is a scheme to allow parents and guardians to start a pension plan for their children even as they are minors. Parents can set off their children on a path to save for their retirement with this scheme and play an impactful role in securing their future. In short, parents are investing in their children’s pension.

So, it is a variant of the existing National Pension Scheme (NPS) introduced in 2004 but tailored for younger individuals.

How will this scheme work?

Under this scheme, the parents or guardians will open an account for their minor children and start contributing towards their children’s pension. And, once the minor reaches 18 years of age, the parents have the option to convert the account into a regular full-fledged NPS account or into a non-NPS plan.

What makes this scheme attractive?

One of the key features of the scheme is its flexibility. The account can be converted into a regular NPS account which can then help the parents to flag off their children's pension saving scheme at an early age. Or, they can put the money into a non-NPS plan as well.

What is NPS?

The National Pension System is a government-run investment scheme aimed at providing retirement income to its subscribers. It is a defined contribution-based system, offering a mix of equity, corporate bonds, and government securities. Unlike the other government scheme, Public Provident Fund, NPS is market linked.

It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is known for its flexibility and tax benefits.

What are the tax benefits with NPS?

Contributions to the NPS are eligible for tax deductions under Section 80C and an additional deduction of up to ₹50,000 under Section 80CCD(1B). It is not clear at this point if NPS Vatsalya will also be offered this benefit.

Eligibility criteria to open an NPS account?

Any person who is a citizen of India whether resident, non-resident or an Overseas Citizen of India are eligible to open an NPS account. They have to be between 18 and 70 years of age.  Probably, for NPS Vatsalya, parents will have to give proof of their children's ages to start this account.

What makes NPS Vatsalya special?

It encourages early savings and investment habits among Indian families. The scheme is targetted at parents to start retirement planning for their children at an early stage. This is one way of saving for your children's future, teaching them financial literacy and setting them on the path to saving for their future.

What can be a cause for worry under NPS Vatsalya?

There has to be checks and balances to ensure that savings made by the parents do not entirely slip of out of their control once the child becomes a major.