Budget'24: New NPS scheme for minors launched, here's how you can benefit

The Indian government has introduced an exciting new opportunity in Budget 2024 for those looking to secure their children’s future. Finance Minister Nirmala Sitharaman announced the launch of a new scheme called NPS Vatsalya for children up to 18 years of age during her budget speech in Parliament.

Under this scheme, parents will be able to open NPS accounts in the names of their minor children. Under the NPS Vatsalya scheme, accounts opened in the names of minor children will automatically convert into regular NPS accounts once they reach the age of 18.

Benefits of NPS Vatsalya

Parents can use this scheme to start saving for their children’s retirement early. SEBI-registered investment advisor Jitendra Solanki explains that this will provide children with a significant financial legacy. By the time the children reach adulthood, they will already have a substantial corpus and a strong foundation for building a larger retirement fund. This will help secure their future and potentially provide them with a better pension.

What’s more on NPS?

In her speech, Finance Minister Nirmala Sitharaman also made several other important announcements regarding existing NPS scheme.

• Increased tax benefits for private sector employees

The deduction limit for employers’ contributions to the National Pension System (NPS) raised from 10% to 14%, offering enhanced benefits for employees. These measures aim to simplify the tax structure and provide greater financial relief to taxpayers.

• No New Reforms for Government Employees

Unfortunately for government employees, there was no announcement of changes to the NPS for them in the budget. There were hopes that the government might make significant pension-related announcements this year, but this did not happen. Prior to the budget, there were speculations that the government might introduce a guaranteed pension scheme under NPS, but this did not come to pass. It’s important to note that employees joining after 2004 do not receive the old pension scheme benefits, and there has been a continuous demand for its reinstatement, which the government did not address in this budget.

Understanding the National Pension System (NPS)

The NPS is actually a market-linked scheme made for retirement planning. Initially, this scheme was introduced only for government employees. However, after 2009, the government extended the NPS to employees in the private sector as well.

Money is invested in two ways under NPS: Tier-1 and Tier-2. While NPS Tier-1 is a retirement account, Tier-2 is a voluntary account. When opening the account, you need to invest ₹500 in Tier-1. Following which, you need to deposit ₹1000 into Tier-2. You need to make this contribution every financial year without fail.

Under NPS, you can withdraw 60% of the total accumulated amount as a lump sum at the time of retirement. The remaining 40% of the amount goes into the pension scheme. There is no upper limit for investment in NPS. The larger the annuity amount from the 40%, the better your pension will be during old age.