NPS Vatsalya: How tax benefit can make the scheme attractive for investors

The NPS Vatsalya is the newest government-backed investment scheme centred around minor children. Parents can open an NPS account in the name of minor children to save for their retirement. Deepak Mohanty, Chairman of the Pension Fund Regulatory and Development Authority (PFRDA), said that the newly launched scheme provides an avenue for parents to kickstart retirement savings for their minor children. As the children grow and join the workforce, they can seamlessly transition into the National Pension System (NPS).

NPS Vatsalya is distinct from typical financial products designed for minors, which often offer predetermined or fixed returns. In contrast to these conventional options, NPS Vatsalya presents market-linked returns, enabling the potential for increased investment growth dependent on asset allocation strategies and overall financial market performance. 

The framework of the scheme adopts a proactive investment approach, showcasing the prospect of building a larger pension fund by capitalizing on the advantages of financial markets and sustained investment growth in the long term.

NPS Vatsalya allows parents to make a minimum annual contribution of Rs 1,000 in the name of their children with no maximum limit. As the minor children reach the age of majority (18 years), the account smoothly transitions into a standard NPS account. This feature ensures a seamless financial future for the children with long-term benefits and security.

One thing that the government is yet to declare is the taxation part. Many banks though have announced that the subscribers of new scheme can benefit from tax deductions under Section 80 CCD (1) and Section 80 CCD (1B) of the Income Tax Act, making it a tax-efficient investment option.

Earlier after the announcement of the scheme in the Budget 2024, FM Nirmala Sitharaman had declined to speak about any tax benefit for the new scheme.

"The launch of the NPS Vatsalya Scheme, a minor-centric variant of the traditional NPS in the Union Budget 2024 can help in securing a child’s financial future to a large extent. However, as of now there is no clarity by the government on the tax saving opportunities in the  Vatsalya scheme. Enhanced taxation policies combined with market-linked returns can bolster financial security, by making the scheme more appealing for parents through tax incentives. For instance, introduction of the tax deductions for NPS Vatsalya Scheme under the Income Tax Act, 1961 can offer dual benefits: Reduce the overall tax liability of the contributor and financial security of the child’s future," said Shefali Mundra, Tax Expert- ClearTax.

She further said: "Tax-saving opportunities within regular NPS are one of the most important aspects. Contributions to NPS are eligible for a deduction of up to Rs 1.5 lakhs under section 80C and up to Rs 50,000 under section 80CCD (1B) of the Income Tax Act, 1961. Increasing awareness about the introduction of the tax benefits of investing in NPS Vatsalaya Scheme via educational initiatives and targeted communication strategies can encourage more and more families to invest in a child’s future, enhancing financial inclusion and participation within the scheme." 

How to open an NPS Vatsalya account

Interested individuals who wish to apply for NPS Vatsalya can do so by visiting any designated Federal Bank branches or through the Bank’s online platform. Upon completing the application process, subscribers will be issued a unique Permanent Retirement Account Number (PRAN) for all their future transactions.

To open an NPS Vatsalya Account, follow these steps:

Visit the NPS website or the designated platform for NPS Vatsalya.

Select the ‘Register’ option.

Look for the option to register for a new NPS account and proceed with selecting it.

Provide Guardian Details:

Guardian Name: Full name of the guardian.

Date of Birth: Enter the date in DD/MM/YYYY format.

Permanent Account Number (PAN): Input the guardian’s PAN.

Mobile Number: Provide the guardian’s mobile number.

Email ID: Enter the guardian’s email address.

Minor's Details

> Fill in the necessary details for the child for whom the NPS Vatsalya account is being opened.
> KYC Requirements: Ensure you provide the required KYC documents such as proof of identity and address in compliance with the guidelines.
> Investment Options: Choose the suitable investment option for the NPS account from the available choices.
> Review and Confirmation: Thoroughly review all entered information to ensure accuracy and completeness before proceeding.
> Application Submission: Submit the completed application form for further processing.
> Acknowledgment Receipt: Keep note of the acknowledgment number or receipt provided for future reference.