On Wednesday, Finance Minister Nirmala Sitharaman launched the NPS Vatsalya Yojana to enable children to start saving for their retirement. Parents can open an account for their children from birth to the age of 17.
When the child turns 18, the Vatsalya account will be converted into a regular NPS account, allowing employer contributions when the child starts working.
“NPS has delivered very competitive returns since inception. It has delivered a compound annual growth rate (CAGR) of 9.5 per cent to the government sector. For the non-government sector, it is 14 per cent in equity, 9.1 per cent in corporate debt and 8.8 per cent in government securities,” Sitharaman said at the launch.
The NPS was launched in 2004 for public employees and in 2009 for non-public employees.
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NPS for kids
Parents or guardians can open a Vatsalya account for their children by providing essential documents like Know Your Customer, child’s birth certificate and ID proof. It can be opened through banks, pension fund houses or the e-NPS portal. The money will remain locked for the child till he or she turns 60 years of age. He or she can withdraw 60% tax-free after retirement while 40% will be converted into annuities. It is noteworthy that the parents’ contribution to Vatsalya NPS will not offer them any tax relief as it is for regular NPS contribution under section 80-C of the Income Tax Act.
As far as partial withdrawals are concerned, up to 25% of the principal can be withdrawn for specific purposes such as education, medical treatment for certain diseases or disabilities. It can be withdrawn up to a maximum of 3 times during the entire tenure of the NPS account.
Should you subscribe to NPS Vatsalya?
Given the equity component of the NPS, the opportunity to accumulate wealth is attractive. Up to 75% can be invested in equities, while the rest is invested in corporate bonds and government securities. Parents can split the contribution across three asset classes based on their risk tolerance.
Suppose you invest ₹1,000 per month for your 10-year-old son. Your annual contribution will be ₹12,000. Consider that the child continues with the same investment value once he turns 18. Assuming a CAGR of 12%, the child will have ₹3.91 crore when he turns 60.
Why NPS Vatsalya and not mutual funds?
Mutual funds are equally good from the profitability point of view. They allow you freedom and the ability to withdraw funds at any time. Some mutual funds specifically for children have a lock-in period of five years.
The choice is between freedom of withdrawal and a controlled investment option. Choose the one that is suitable for your child once he or she is an adult.
Read also: When should you sell your mutual fund investments? Experts weigh in.
What about the good old public pension fund?
The Public Pension Fund has a lock-in period of 15 years. A maximum of ₹1.5 lakh can be invested here. The interest rate, which is currently 7.1%, is revised every quarter.
Take mint:With NPS Vatsalya, the government has offered an attractive investment option to secure your child’s future. The child can experience the power of capital and the magic of compounding right from the start. Choose mutual funds or PPF for your child’s education and wedding goals. A little diversification in NPS Vatsalya could go a long way in introducing your child to financial literacy and at the same time building wealth for him.
Read also: How a 55-year-old architect from Bhopal built ₹2 crore NPS retirement funds
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