NPS Vatsalya Scheme : Interest Rate, Eligibility, Tax Benefits

The National Pension System (NPS) Vatsalya scheme is a savings and pension plan designed specifically for minors. Managed by the Pension Fund Regulatory and Development Authority (PFRDA), this scheme allows parents or guardians to open an account for children under 18. With a minimum contribution of ₹1,000 per year and no maximum limit, the NPS Vatsalya scheme aims to secure financial futures and promote long-term investment. When the child becomes an adult, they can smoothly switch to a regular NPS account. This scheme offers flexible investment choices, including equity and debt options, ensuring a balance of growth and security for future financial needs.

Table of Contents

NPS Vatsalya Scheme Overview

NPS Vatsalya scheme offers flexible investment options, encouraging long-term savings and future planning. Here is a breakdown of NPS Vatsalya scheme details:

Features	Details
Eligibility	Indian citizens under 18 years
Contribution Limit (Min. to Max.)	₹1,000 per year to No maximum limit
Account Control	Operated by a guardian until age 18
Investment Choices	Moderate, Conservative, and Aggressive Life Cycle Funds; Active Choice available
Lock-in Period	Three years for partial withdrawal eligibility
Withdrawal Rules	Up to 25% after three years for education, illness, or disability
Exit Options	At 18, 80% annuity for corpus above ₹2.5 lakh; 100% lump sum for ≤ ₹2.5 lakh
Death Benefit	Entire corpus transferred to the guardian on the death of a minor
Tax Benefits	Upto ₹50,000 u/s 80 CCD (1B), over ₹1.5 lakh limit under 80C (Tier I)

NPS Vatsalya Scheme Release Date

Finance Minister Nirmala Sitharaman launched the NPS Vatsalya Scheme on September 18, 2024. This combined savings and retirement plan allows parents and guardians to invest yearly in their children.

Interest Rate for NPS Vatsalya Scheme

Unlike traditional savings accounts, the NPS Vatsalya scheme has no fixed interest rate. Instead, returns are based on the performance of the investments chosen within the scheme. Historically, NPS funds have shown average returns of around 10-12%, but the actual returns can vary based on market conditions and the specific investment choices made by the guardian. NPS Vatsalya Scheme interest rate plays a key role in determining the potential growth, but since it isn’t fixed, it reflects the fluctuations of the market and investment choices.

PRAN Issuance

Upon successful registration for the NPS Vatsalya Scheme, a Permanent Retirement Account Number (PRAN) is issued. Here’s how it works:

Unique Identification: PRAN is a unique 12-digit number assigned to each user, ensuring their account is distinct and secure.
One-Time Issuance: Once issued, the PRAN remains the same throughout the investor’s lifetime, even if they change employment or location.
Access to Account: With PRAN, users can log in to their accounts through the Central Recordkeeping Agency (CRA) portal, where they can monitor contributions, view transaction history, and manage investments.

Contribution Limit in NPS Vatsalya Scheme

The NPS Vatsalya Scheme offers flexibility in contributions. The initial and subsequent minimum contribution is ₹1,000 per year. This ensures that the account remains active with a modest annual investment. There is no upper limit on contributions, allowing individuals to invest any amount they wish above the minimum requirement.

Choosing a Pension Fund in NPS Vatsalya Scheme

Under the NPS Vatsalya Scheme, the guardian can select a pension fund to manage the investments. Guardians can choose from various pension funds registered with the PFRDA. Approved financial institutions manage these funds to ensure the professional handling of investments.

Each pension fund offers different strategies, typically including a mix of equity, corporate debt, and government securities, allowing for growth and stability over time. Guardians can switch between Pension Funds, enabling them to adapt to changing financial goals or market conditions. This selection process gives the guardian control over how the minor’s contributions are invested, balancing risk and returns according to their preferences.

Investment Options in NPS Vatsalya Scheme

The NPS Vatsalya Scheme provides two main investment choices, allowing you to adjust your portfolio to match your risk level and financial goals.

Auto Choice (Lifecycle Fund)

This option automatically allocates investments based on the user’s age, gradually reducing equity exposure as the person ages. Options within Auto Choice are:

Aggressive LC-75: Up to 75% in equity for higher growth potential
Moderate LC-50: 50% equity, balancing risk and return
Conservative LC-25: 25% equity, focusing on stable, lower-risk returns

Active Choice

This allows the guardian to allocate funds manually across different asset classes, including:

Equity (up to 75%)
Corporate Debt (up to 100%)
Government Securities (up to 100%)
Alternate Assets (up to 5%)

These options let guardians either manage the fund themselves or have it automatically adjusted to the child’s age, creating a customised investment plan for long-term growth.

Reaching the Age of 18

When the user of the NPS Vatsalya Scheme reaches 18 years of age, several options and changes come into effect:

Seamless Transition to NPS Tier I

The account automatically shifts to a regular NPS Tier I account, designed for all citizens.
This allows investors to continue with the NPS benefits, contributing to their retirement savings.

Fresh KYC Requirement

The consumer must complete a fresh KYC process within three months of turning 18.
This step verifies the identity of the now-adult account holder and updates the account details as necessary.

Exit Options Based on Corpus

If the corpus is above ₹2.5 lakh, 80% must be invested in an annuity plan that provides a regular income stream. The remaining 20% can be withdrawn as a lump sum. If the corpus is ₹2.5 lakh or less, the entire amount can be withdrawn as a lump sum, offering flexibility based on the total accumulated savings.

NPS Vatsalya Scheme Eligibility Criteria

The eligibility criteria for the NPS Vatsalya Scheme are as follows:

Age Requirement: The scheme is open to minors, meaning Indian citizens below 18.
Citizenship: Only Indian citizens are eligible to open an NPS Vatsalya account.
Guardian Requirement: The account must be opened and managed by a guardian (parent or legal guardian) until the minor reaches adulthood.
KYC Compliance: The guardian must complete KYC verification, including proof of identity and address.

Reasons to Join NPS Vatsalya

Here are some key reasons to consider joining the NPS Vatsalya scheme:

Long-term Financial Security: Provides a solid financial base for minors, helping them build wealth for the future.
Teaches Financial Responsibility: Introduces young individuals to pension planning and long-term investment.
Encourages Regular Savings: Promotes disciplined savings from an early age with the flexibility of contributions.
Tax Benefits: Offers tax deductions under sections 80C and 80CCD (1B), adding value to the investment.
Flexible Investment Options: Allows choice of investment strategies, including equity and debt, based on risk preference.
Seamless Transition to Adult NPS: Once the minor turns 18, the account can easily shift to a regular NPS Tier I account.

Required Documents for NPS Vatsalya Scheme

An investor needs the following documents to open an NPS Vatsalya account:

Guardian’s KYC Documents: Proof of identity and address, such as Aadhaar, Passport, Voter ID, Driving License, NREGA Job Card, or National Population Register document
Minor’s Date of Birth Proof: Acceptable documents include the Birth Certificate, School Leaving Certificate, Matriculation Certificate, PAN, or Passport.
Bank Account Details (if applicable): If the guardian is an NRI, an NRE/NRO Bank Account (solo or joint) for the minor is necessary.
Guardian’s Signature: A scanned copy of the guardian’s signature for verification purposes.

Steps to Open and Apply for the NPS Vatsalya Scheme in India

The NPS Vatsalya scheme offers a straightforward way to plan for retirement with reliable, market-based returns. This scheme aims to give people an easy, paperless option to open an NPS account right from home or office. With this long-term savings plan, individuals can feel secure about their future by creating a financial cushion for their retirement years. Here’s how to enrol online for the NPS Vatsalya scheme:

Start by selecting the ‘Apply Now’ option under NPS on the website.
To open your NPS account, choose a Central Recordkeeping Agency (CRA), such as CAMS, K-Fin Technologies, or Protean e-Gov Technologies (formerly NSDL).
Complete the online form, ensuring you fill in all mandatory fields.
You’ll receive an Acknowledgement ID for your registration, which allows you to continue the form within 15 days if necessary.
Select a KYC verification method: PAN-based (using details from your bank) or Offline Aadhaar XML KYC (via UIDAI).
Provide details such as bank information, nominee, and scheme preferences, and upload required documents like your photo, signature, cancelled cheque, and PAN.
Make an initial minimum contribution of ₹500 through HDFC NetBanking or another payment gateway.
Upon successful payment, a 12-digit PRAN will be generated and sent to you by email and SMS, along with a PDF summarising your information.
Finalise the process with an e-sign or OTP for digital confirmation, eliminating the need to send physical documents.

NPS Vatsalya Scheme Withdrawal and Exit Guidelines in India

The NPS Vatsalya Scheme in India offers specific withdrawal and exit rules to ensure flexibility and security for the subscriber. Here’s a breakdown:

Partial Withdrawals

Eligibility: Allowed after a lock-in period of 3 years
Purpose: Withdrawals are permitted for education, specified illnesses, or disabilities.
Limit: Up to 25% of the contributions can be withdrawn.
Frequency: Allowed a maximum of three times over the account’s lifespan.

Exit Rules Upon Turning 18

If the total corpus is above ₹2.5 lakh, 80% of the funds must be used to purchase an annuity, while the remaining 20% can be withdrawn as a lump sum.
If the total corpus is ₹2.5 lakh or less, the entire amount can be withdrawn as a lump sum.

The entire corpus is transferred to the guardian or nominee if the minor dies.

Tax Advantages of the NPS Vatsalya Scheme

The NPS Vatsalya Scheme offers several tax benefits for contributions made to a Tier I account, designed to enhance the overall value of the investment. Here are the key NPS Vatsalya Scheme tax benefits available:

Section 80 C Deduction

Contributions to the NPS Vatsalya account qualify for tax deductions under Section 80 C, with a combined limit of ₹1.5 lakh. This limit includes other eligible investments and expenses covered under Section 80C.

Section 80 CCD (1B) Deduction

An additional tax deduction of up to ₹50,000 is available under Section 80 CCD (1B) for contributions to the NPS account. This is over and above the ₹1.5 lakh limit under Section 80C, providing further tax-saving opportunities.

Employer Contributions (if applicable)

For salaried individuals, employer contributions (if the employer participates in NPS) are also tax-deductible under Section 80 CCD (2), up to 10% of the basic salary plus dearness allowance. This deduction is allowed on top of the employee’s contributions and is not subject to the ₹1.5 lakh limit under Section 80 C.

Applicable to Old Tax Regime

These tax benefits are only available under the old tax regime. Individuals choosing the new tax regime will not be eligible for these deductions.

NPS Vatsalya Scheme Calculator

For the NPS Vatsalya Scheme, potential returns can be calculated based on estimated rates of return over a period, considering contributions made yearly. Here’s an example of how the calculation might work, using some historical return rates for illustration purposes.

Step-by-Step Calculation using NPS Vatsalya Scheme Calculator

Monthly Investment: Start by investing ₹1,000 each month for your child, totalling ₹12,000 annually.
Annual Increase: Increase your investment by 10% to utilise the power of compounding. So, in the second year, you would invest ₹13,200 (10% more than the first year), and so on.

Investment Growth by Age 18

Over 18 years, with a 10% increase each year, your total investment will be around ₹5,47,190.
Assuming an average annual return of 10%, the interest earned over 18 years could be approximately ₹7 lakh.
This would bring the total accumulated amount to ₹12 lakh by the time the child is 18 years old.

Continuing Investment until Retirement (Age 60)

If the child continues investing in the same pattern (10% annual increase) until the age of 60, the total fund could grow to around ₹15.34 crore due to the power of compounding and the yearly increase in contributions.

Retirement and Annuity

According to NPS rules, 40% of the accumulated amount must be invested in an annuity at age 60. In this example, ₹6.14 crore would go towards an annuity.
Assuming a 6% return from the annuity, this could provide a monthly pension of approximately ₹3.06 lakh for the rest of the child’s life.

FAQs About NPS Vatsalya Scheme

What is the minimum and maximum contribution in the NPS Vatsalya scheme?

The NPS Vatsalya Scheme requires a minimum contribution of ₹1,000 annually to keep the account active. No maximum limit exists, so you can invest as much as you like beyond this minimum amount.

Is the NPS Vatsalya Scheme available only to government employees?

No, the NPS Vatsalya Scheme is not limited to government employees. It is available to all Indian citizens below 18 years of age, allowing parents or guardians to open an account for their minor children.

Can a subscriber nominate multiple beneficiaries under the NPS Vatsalya Scheme?

No, under the NPS Vatsalya Scheme, a subscriber cannot nominate multiple beneficiaries.

What happens if the NPS subscriber dies before retirement?

If an NPS subscriber passes away before retiring, the accumulated corpus in the account is handed over to the nominee or legal heir.

How is the pension amount determined under the NPS Vatsalya scheme?

The pension amount under the NPS Vatsalya Scheme is determined by the accumulated corpus and the type of annuity plan chosen at the time of exit or retirement.