Budget 2025: Investment in NPS Vatsalya to get tax benefit of up to Rs 50,000; check details    

NPS Vatsalya 2025: During her Budget speech, Finance Minister Nirmala Sitharaman revealed that subscribers of the pension scheme NPS Vatsalya will now enjoy equivalent tax benefits as regular NPS contributors under Section 80CCD(1B). In a bid to enhance the appeal of NPS Vatsalya, Sitharaman proposed a tax exemption for annual contributions up to Rs 50,000 for participants.

"I am also proposing to allow similar treatment to NPS Vatsalya accounts as is available to normal NPS accounts, subject to overall limits," FM Sitharaman said in Lok Sabha.

Finance Minister Sitharaman expanded tax exemptions for NPS Vatsalya, including Sections 80CCD(1B), 12(B), and 80CCD(3).  This exemption is above the normal Rs 1.5 lakh under Section 80C. 

Withdrawals of up to 25% of self-contributions under Section 12(B) will now be eligible for exemption. Furthermore, tax relief on the inheritance of accumulated wealth from deceased NPS subscribers under Section 80CCD(3) has also been extended to the scheme.

It should be noted that this tax benefit will not apply to the New Tax regime. This strategic decision aims to stimulate higher retirement savings and ensure financial security for dependents through the NPS program.

“It is proposed to extend the tax benefits available to the National Pension Scheme (NPS) under sub-section (1B) of section 80CCD of the Income-tax Act, 1961 to the contributions made to the NPS Vatsalya accounts, as applicable,” Sitharaman said on February 1, 2025.

During the July 2024 Budget announcement, FM Sitharaman introduced NPS Vatsalya, a program tailored for minors which was officially rolled out on 18th September 2024. This initiative allows parents to contribute to their children's National Pension System (NPS) accounts, ensuring their financial security and promoting the concept of saving for retirement from a young age.

Taxpayers who make contributions to NPS Vatsalya accounts for their children, dependents, or designated beneficiaries are eligible for an additional tax deduction of Rs 50,000 under Section 80CCD(1B), similar to the deductions available for regular NPS contributions.

The main goal of NPS Vatsalya is to promote the development of early retirement saving habits and ensure future financial security. Parents are able to establish accounts for their children and make contributions towards their retirement savings, fostering disciplined saving habits from a young age. 

At present, parents or guardians have the option to open a pension account for a child and make an annual contribution of at least ₹1,000, with no maximum limit. The recent tax incentives are anticipated to boost involvement in the program.