NPS-Vatsalya: A new savings plan for minors with limitations | Fusion - WeRIndia

Budget 2024 has introduced NPS-Vatsalya, a new scheme allowing parents and guardians to contribute to minors’ accounts.

It can be converted into a regular NPS (National Pension Scheme) account once the minor reaches adulthood.

Initially celebrated as a market-linked savings plan with tax benefits for higher education, the scheme’s practicality has come under scrutiny. Under NPS-Vatsalya, parents or guardians can open an account and make regular contributions.

Upon the minor attaining majority, the account transitions into a regular NPS account. However, this essentially translates into a retirement savings plan for the minor.

The uptake of NPS in the corporate sector is only 10-15 percent, and individuals often struggle to save for their own retirement due to high expenses and short-term financial goals. Expecting parents to save for their children’s retirement is unrealistic.

The primary need for citizens is a savings plan that helps fund the ever-increasing costs of higher education.

Even savvy investors are unlikely to prioritize saving for their child’s retirement over more immediate educational expenses. Therefore, NPS-Vatsalya falls short for those considering it from an educational savings perspective.

Current NPS rules allow partial withdrawals of 25 percent of contributions after three years and premature exits after five years, with 20 percent of the corpus being tax-free.

The balance must be invested in an annuity scheme, and corpus amounts below ₹2.5 lakh can be withdrawn prematurely. Given these conditions, NPS is unsuitable for saving for higher education.

The limited withdrawal options mean the available funds may be too low to cover substantial educational costs.

For example, contributing ₹10,000 monthly for ten years at a 10 percent return would yield only ₹3 lakh for partial withdrawal and ₹4 lakh for premature withdrawal—insufficient for higher education in India.

To make NPS-Vatsalya a viable option for education savings, the scheme needs significant modifications, as per financial experts.

These include tax-free withdrawals, allowing family members’ contributions to the scheme etc. Without these changes, the scheme’s adoption is likely to remain limited.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on March 12, 2017

Image Reference: https://pxhere.com/en/photo/1112136