6 things you should know before opening NPS Vatsalya for your child

Indian Finance Minister Nirmala Sitharaman has introduced the NPS Vatsalya scheme, which is exclusively for young subscribers. NPS Vatsalya is a scheme where parents or guardians can start saving for their minor children and then have the option to convert this account into an NPS Tier 1 account later.

But before you sign, here are six things you should know about NPS Vatsalya:

1) Restrictive equity quota: Through Vatsalya NPS, you can invest a maximum of 75% in equities through Active and Automatic options. In the Standard option, you have the option to invest 50% in equities. The fact that equities tend to give higher returns in the long run does not give you the option to invest 100% in equities like mutual funds do.

2) Becomes a regular NPS account: When the minor reaches the age of 18, the NPS Vatsalya account is automatically converted into a regular NPS account, allowing the young adult to continue to manage their retirement savings independently. The aim is to ensure that the scheme ensures that a substantial retirement wealth is built up by the time the child reaches adulthood. However, at 18, you may be more concerned about your child's education than his or her pension.

3) Retreat: The good thing is that withdrawals are possible. However, the amount is capped at 25% of the contribution after a lock-in period of 3 years and is given for education, certain illnesses and disabilities. Moreover, you can withdraw a maximum of 3 times, so keep in mind that in case of emergency, you can only withdraw up to 25% for education or other purposes.

4) Exit restrictions: If the assets are more than Rs 250,000, 80% of the fund will be used to purchase an annuity and 20% can be withdrawn as a lump sum.

Hence, you cannot withdraw a lump sum amount when the child turns 18 and use it for other purposes. The scheme is specially designed for planning for retirement of your child. In case of capital less than or equal to Rs 2.5 lakh, the entire capital can be withdrawn as a lump sum.

5) Care for your child: NPS is a retirement account. So NPS Vatsalya is saving for your child's pension. But before you save for your child's pension, you may need to cover other milestones like your child's education and your own pension. Don't think about your child's pension until you have already set aside enough money for your short and long term goals.

6) Tax benefits: Finally, there are currently no clear guidelines on the tax benefits specifically for NPS Vatsalya. Experts opine that the benefits of the scheme can be lumped together with the regular tax deductions available on NPS contributions under sections 80C and 80CCD (1B) of the Income Tax Act. However, an official clarification is yet to be issued.