The tax relief on contributions and withdrawals also makes it more lucrative for investors.
NPS Vatsalya
The latest Union Budget has expanded tax deductions for contributions made to the National Pension System's Vatsalya child welfare pension program. Under the revised Section 80CCD(1B), parents can claim deductions up to ₹50,000 for deposits into their child's NPS account, over and above the existing ₹1.5 lakh deduction limit under Section 80C.
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The program is managed by the Pension Fund Regulatory and Development Authority (PFRDA) and aims to incentivise long-term savings for major future expenses related to children's needs. The tax benefit may make it more attractive for parents to invest in securing funds for their child's higher education, marriage, or other financial needs after they reach adulthood. By channelling savings into the NPS early on, parents can also take advantage of the power of compounding returns over the long term.
The Key Highlights of the Proposed Changes:
- Parents can claim a deduction of up to ₹50,000 for contributions made to their child's NPS Vatsalya account
- This deduction will be over and above the ₹1.5 lakh limit under Section 80C
- The tax exemption will be available only under the old tax regime
- Any partial withdrawals from the account will not be taxed up to 25% of the contributions
Building a Secure Future for Your Children
The NPS scheme details will help parents and legal guardians to start investing early for their children's key financial needs. By opening this pension account, they can accumulate a retirement corpus to financially secure their child's future.
Some key benefits of investing in the NPS Vatsalya plan:
- Attractive returns as the funds are invested across equities, corporate bonds, government securities, etc.
- Low charges with a total expense ratio of 0.01% to 0.09%
- Option to choose your preferred investment mix and pension fund manager
- Partial withdrawals allowed for specified expenses like higher education and marriage
- On retirement, 60% of the corpus can be withdrawn as a tax-free lump sum
With the latest tax deduction, the NPS Vatsalya government-regulated program becomes even more lucrative for parents.
Tax Relief on Contributions up to ₹50,000
The parent/guardian contributing to the NPS Vatsalya account can claim a deduction of up to ₹50,000 in a financial year. This is over and above the ₹1.5 lakh deduction limit under Section 80C.
For example, if a parent invests ₹75,000 in their child's NPS account, they can claim ₹50,000 as a deduction under the new Section 80CCD (1B) rule. The remaining ₹25,000 will be covered under the ₹1.5 lakh limit of Section 80C.
Thus, this additional deduction limit incentivises more long-term retirement savings for the child's future needs.
Tax-Exempt Partial Withdrawals up to 25% Allowed
As per the new provisions, account holders can withdraw up to 25% of their contributions without paying any tax on that amount. This withdrawal limit aims to provide people with more flexibility to meet children's educational costs, medical treatment expenses for specified illnesses, disability-related requirements, etc, while retaining the overall tax efficiency of the NPS initiative.
For example, if someone has contributed ₹3 lakhs to their NPS account over the years, they would be able to withdraw up to ₹75,000 tax-free under this provision. This feature gives people a way to address contingencies pertaining to children's needs while continuing to save for their own retirement under the NPS framework. The partial withdrawal eligibility provides an extra layer of financial security for families saving via NPS.
Hassle-Free Account Opening Process
Parents can easily open an NPS Vatsalya account online via the Protean eNPS platform or through Points of Presence (POPs). The online process takes less than 10 minutes.
The required documents include ID/address proof of parent and child, child's birth certificate, bank details and recent photograph. Permanent Account Number (PAN) is mandatory.
Once opened, the account is managed by the parent/guardian till the child turns 18 years old. On attaining majority, the child has the option to continue or withdraw as per the system rules.
How to Open an NPS Vatsalya Account
- Visit Protean eNPS portal
- Enter details like name, DOB, guardian details, contact information
- Upload KYC documents
- Make an initial contribution to the account
- The account gets activated within 7 days
The entire process is paperless and completed online through Aadhar-based authentication. This makes it convenient for parents to open and manage the NPS Vatsalya account seamlessly.
Facilitating Secure Retirement for Children
The NPS Vatsalya initiative enables disciplined long-term investing to create a retirement corpus for children. It inculcates the habit of systematic savings from an early age.
With attractive returns potential and now tax benefits, the initiative offers a flexible, low-cost channel for parents to financially secure their children's future.
The tax relief on contributions and withdrawals also makes it more lucrative for investors. Overall, the NPS Vatsalya aims to expand the reach of pension investments and enhance citizens' retirement readiness.
Making Your Child’s Future Financially Secure
Starting early is the key to building a sizeable retirement corpus through the power of compounding. The NPS Vatsalya allows parents to apply this principle to their children's future needs.
Some tips to maximise returns from NPS Vatsalya:
- Start when your child is still young; even small monthly contributions can accumulate substantially over 18-20 years
- Opt for the Auto Choice option if you are unsure about asset allocations
- Increase allocation to equities as the child grows older for better returns
- Avoid withdrawals before maturity to benefit from tax exemptions
As per Pension Fund Regulatory and Development Authority (PFRDA) projections, an annual contribution of ₹10,000 invested from birth to 25 years at an expected return rate of 12% can grow to around ₹35 lakhs on maturity. This showcases the immense potential of long-term investing through NPS Vatsalya.
Conclusion
The NPS Vatsalya initiative provides a structured way for parents to secure their child’s financial future while enjoying tax benefits. With an additional ₹50,000 tax deduction under Section 80CCD(1B), this initiative incentivises long-term savings, making it a smart investment choice. The flexibility of withdrawals, low-cost structure, and attractive returns further enhance its appeal.
By starting early and contributing consistently, parents can build a strong retirement corpus for their children. With simple account opening and seamless management, NPS Vatsalya is a valuable step toward financial security for the next generation.
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