NPS Vatsalya Scheme: Eligibility, Contribution Amount, Withdrawal, Benefits, Application Process, and More

Union Finance Minister Nirmala Sitharaman officially launched a new pension scheme for minors, "NPS Vatsalya," in New Delhi on September 18, 2024. The scheme is designed for children aged 0 to 18, allowing parents to manage their children's pension accounts. The goal is to instill financial awareness and security from an early age. Originally announced in the previous budget, this initiative aims to promote a strong savings culture among younger generations, ultimately fostering financial independence in the future.

What is NPS Vatsalya?

NPS Vatsalya is a contributory pension scheme governed by the Pension Fund Regulatory and Development Authority (PFRDA). It allows parents or guardians to open a pension account on behalf of minors. This initiative recognizes the importance of instilling financial literacy and independence in future generations, encouraging families to save and invest for their children's future.

The core idea behind NPS Vatsalya is to promote early investment habits. With the compounding benefits of long-term savings, children will have the chance to build a solid financial foundation before they even reach adulthood. Once the child turns 18, they can either continue with the NPS or transition to a non-NPS scheme, giving them control over their financial assets.

Eligibility and Account Management

The NPS Vatsalya scheme is open to all Indian minors, i.e., individuals under 18 years of age. The account is opened in the child’s name, but the guardian manages it until the child reaches adulthood. The child remains the sole beneficiary, while the guardian assumes responsibility for all operations, from opening the account to making contributions and selecting the investment portfolio.

Contributions and Fund Selection

To open a Vatsalya account, an initial deposit of Rs 1,000 is mandatory. After this, families must contribute at least Rs 1,000 annually. There is flexibility in terms of how much additional money can be deposited, making it a viable option for parents across different income brackets.

Guardians can choose from a range of pension funds registered with PFRDA, allowing them to pick an investment approach that aligns with their risk appetite. The scheme provides two broad choices: Auto Choice and Active Choice. Under Auto Choice, funds are automatically allocated based on the child’s age and risk tolerance, with options for aggressive, moderate, and conservative risk levels. The Moderate Life Cycle Fund (LC-50), with a 50% equity allocation, is the default choice. Guardians can also opt for a more aggressive LC-75 (75% equity) or a conservative LC-25 (25% equity) plan.

In Active Choice, the guardian has more control over how funds are allocated. They can actively decide the percentage to invest in equity (up to 75%), corporate debt (up to 100%), government securities (up to 100%), and alternate assets (up to 5%).

Where and How to Open an Account

Opening an NPS Vatsalya account is a simple process. Parents can choose between online platforms like eNPS or physical Point of Presence (PoPs), including major banks, India Post, and pension funds, to register. A list of approved PoPs is available on the official PFRDA website. The required documents for account creation include proof of the child's date of birth, such as a birth certificate or school leaving certificate, and the guardian’s KYC (Know Your Customer) documents. For non-resident Indians (NRIs), a specific NRE or NRO bank account must be used.

Transition to Adulthood

One of the scheme’s most appealing features is its seamless transition. Upon turning 18, the account automatically converts into a regular NPS Tier I account. This allows the young adult to continue investing or withdrawing as per the guidelines of the Tier I plan. The child can choose between continuing with their current investments or switching to new funds under the NPS system. The PFRDA requires fresh KYC documents within three months of the child reaching 18 years of age, ensuring compliance with updated regulations.

Benefits of NPS Vatsalya Scheme

• The NPS Vatsalya scheme offers numerous benefits, primarily fostering early financial security and savings habits in children. By allowing parents to contribute as little as Rs 1,000 per month, the scheme is accessible to families across various income levels, while offering no upper limit for greater flexibility.

• It provides a range of investment options, allowing guardians to select funds that align with their risk tolerance, either through Auto or Active Choice.

• Upon reaching 18, the account seamlessly transitions to a regular NPS, enabling continued savings or withdrawal options. Additionally, the scheme promotes long-term financial independence and security, helping to build a solid foundation for the future.

Withdrawal and Exit Options

There are specific provisions for withdrawals, particularly in cases where funds are required for essential purposes like education, medical emergencies, or disabilities. Guardians can withdraw up to 25% of the contributions after a three-year lock-in period, but only for specific reasons. However, full withdrawal options depend on the accumulated corpus. If the total is Rs 2.5 lakh or more, 80% must be utilized to purchase an annuity, with the remaining amount taken as a lump sum. If the accumulated amount is less than Rs 2.5 lakh, the entire balance can be withdrawn in a lump sum.

In Case of Death or Change in Guardianship

The scheme includes safeguards for unfortunate circumstances such as the death of the minor or the guardian. In the event of the child’s death before reaching 18, the entire accumulated corpus is returned to the guardian. If the guardian passes away, another guardian can be registered through a fresh KYC process. Should both parents die, the legally appointed guardian can continue managing the account or let it transition to the child at 18. 

NPS Vatsalya is a forward-thinking initiative that focuses on inculcating a culture of savings from a young age. With its flexible contribution structure and a variety of investment choices, it ensures that children are financially secure and educated about investments.