Budget 2024: What is NPS 'Vatsalya' scheme? How to apply & other benefits?

Nowadays, many people start investing right from the birth of their children to secure their future. Until now, most people have been investing in Public Provident Fund (PPF) and Systematic Investment Plans (SIPs) in mutual funds. But now, there is a new option for investing for children — NPS Vatsalya. Finance Minister Nirmala Sitharaman announced this scheme in Budget 2024. What is this scheme about, and who should consider investing in it? Let’s understand.

NPS Vatsalya scheme has been designed keeping in mind the existing NPS. In this new plan, parents or guardians can open accounts for their minor children, contributing to their retirement savings fund. These savings will serve the child’s retirement needs. After reaching the age of 18, the child can manage this account independently. Upon becoming an adult, this plan is convertible to a Non-NPS plan without any hindrance. Parents also have the option to convert the account to a regular NPS account. Through this scheme, provisions for children’s pensions have been made.

How much corpus can you build via Vatsalya?

If you open an account in NPS Vatsalya and invest Rs. 5,000 per month, let’s understand how much fund can you accumulate.

With an investment of Rs. 5,000 per month, you would invest Rs. 60,000 annually for your child. This way, you would invest Rs. 10.80 lakhs over 18 years. Assuming an annual return of 10%, the investment would grow to Rs. 19.47 lakhs by the end of 18 years. Thus, a total fund of Rs. 30.27 lakhs accumulation is possible. If parents continue contributing until their child starts earning, and if the child continues the account in the same manner, Rs. 36 lakhs could accumulate in the NPS account by the time they turn 60. Considering a 10% return, this could potentially amount to Rs. 20.50 crores.

Note that these are estimated returns. Assuming a corpus of Rs. 20 crores, your child could potentially receive Rs. 12 crores from NPS at retirement. According to current rules, you would need to purchase an annuity plan for pension with Rs. 8 crores. It is certain that this amount will ensure a significant monthly pension.

More clarity needed..

NPS is an equity-linked scheme where returns vary based on market performance. A portion of this investment is also made in corporate and government securities. Depending on the account holder’s age, rebalancing occurs. Looking at past figures, the E-Tier-1 scheme has provided an average return of more than 13% annually over the past 10 years. HDFC and UTI pension funds have returned more than 14%. Over the past five years, the return has been between 18% and 19%. Kotak, UTI, HDFC, and ICICI pension funds have had returns exceeding 19% annually.

Personal finance expert Jitendra Solanki says that as it is a government scheme, NPS is a low-cost investment. NPS Vatsalya is a new option for long-term investment for children. When will the facility to open this account be available? Will there be tax benefits on this investment? Many such questions are not yet clear. For parents who want to save for their children’s future and provide financial security after retirement, this could be a good scheme.

Opening an NPS account is a straightforward process. You can open this account on the Pension Fund Regulator’s website, eNPS. All government and private banks also provide this facility. While there is still clarity required on the rules related to NPS Vatsalya, it is certain that this scheme could prove to be an excellent option for your children.