NPS Vatsalya Scheme: Know eligibility, investment choices etc.

On Tuesday, Union Finance Minister Nirmala Sitharaman officially launched the much anticipated NPS Vatsalya scheme, an online new pension scheme platform. The scheme is designed to help parents save for their children’s future through a pension account, leveraging the benefits of long-term wealth accumulation and compounding. This scheme has an option to convert the account into an NPS Tier 1 account when the child reaches adulthood. NPS Vatsalya is an extension of the existing National Pension Scheme (NPS) but focuses on children below the age of 18 years.

NPS Vatsalya will ensure long-term wealth accumulation. With flexible contributions starting as low as Rs 1,000 annually with no upper limit, it’s accessible to families across all economic backgrounds. Once the child attains the age of 18, the corpus of up to Rs 2.5 lakh can be withdrawn entirely and if it exceeds, the 20% can be withdrawn, and the remaining 80% can be used for annuity purchase in the NPS.

Eligibility for NPS Vatsalya requires the following:

1. The child must be under 18 years old.
2.  Both the child and the parent must be Indian citizens.
3. All parties must comply with the Know Your Customer (KYC) requirements.

Investment choices:

Under the NPS Vatsalya Scheme, parents have the following investment options based on how much risk they are comfortable with and their financial goals. Here’s a simple breakdown:

1. Default Choice: 

Moderate Life Cycle Fund (LC-50): 50% of the investment goes into equities (stocks), which offer moderate growth potential with a balanced approach.

2. Auto Choice (Life Cycle Funds): 

This option automatically adjusts the investment based on your age, and there are three sub-options:

Aggressive (LC-75): 75% equity (higher risk, higher return potential).

Moderate (LC-50): 50% equity (medium risk and return).

Conservative (LC-25): 25% equity (lower risk, lower return).

3. Active Choice: 

Here, parents can directly decide how to allocate the funds:

Equity: Up to 75%.

Corporate debt: Up to 100%.

Government securities: Up to 100%.

Alternative assets: Up to 5%.

This gives flexibility for parents to pick the option that matches their preferences and financial plans.

Withdrawal rules:

After three years, partial withdrawals from the corpus allowed up to 25% of the corpus for specific purposes, including education, medical treatment for certain illnesses, or disabilities over 75%. Subscribers are allowed up to three partial withdrawals before turning 18.

Once the subscribers reach 18 years old, they can choose to withdraw the funds. If the total corpus is Rs 2.5 lakh or less, they can withdraw the entire amount. If the corpus exceeds Rs 2.5 lakh, 20% can be withdrawn as a lump sum, with the remaining 80% used to purchase an annuity for regular income.

Alternatively, the subscriber can keep their account open and convert it to an NPS Tier I regular account. However, a fresh KYC must be completed within three months of the subscriber’s 18th birthday.

Death of the subscriber:

In the unfortunate event of a subscriber’s death, the entire corpus is given to the nominee, usually the guardian. If the guardian dies, a new guardian must be assigned after completing a new KYC.

If both parents die, a legal guardian can manage the account without further contributions until the child turns 18.

NPS Vatsalya account can be opened through Points of Presence (POPs) which include major banks, India Post, Pension Funds, etc., and the online platform, e-NPS. The scheme is managed by the Pension Fund Regulatory and Development Authority (PFRDA).