Nirmala Sitharaman launches NPS Vatsalya scheme

by / ⠀News / September 20, 2024
Nirmala Sitharaman launches NPS Vatsalya scheme

Finance Minister Nirmala Sitharaman launched the NPS Vatsalya Yojana on Wednesday. This scheme lets parents open a Vatsalya account for their children from birth up to 17 years old. When the child turns 18, the account will convert into a regular National Pension System (NPS) account.

This will allow employer contributions when the child starts working. Sitharaman said NPS has provided good returns since it started.

NPS has provided a compounded annual growth rate (CAGR) of 9.5% for the government sector, 14% in equity for the non-government sector, 9.1% in corporate debt, and 8.8% in government securities,” she stated at the launch.

Parents or guardians can open a Vatsalya account through banks, pension fund houses, or the e-NPS portal. They will need to provide documents like Know Your Customer (KYC), the child’s birth certificate, and proof of identity. The money in the account will be locked until the child turns 60.

At that point, 60% of the money can be taken out tax-free, while the remaining 40% will convert into annuities. Contributions to NPS Vatsalya will not provide any tax relief to parents, unlike regular NPS contributions under Section 80-C of the Income Tax Act.

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NPS Vatsalya for children’s future

However, up to 25% of the money can be withdrawn for specific purposes like education or medical treatment. Withdrawals can be made up to three times throughout the NPS account. The NPS Vatsalya offers a good opportunity to build wealth due to its large equity component.

Parents can put up to 75% of the contributions into equities, with the rest going into corporate bonds and government securities based on their risk level. For example, investing 1,000 per month for a 10-year-old child, continuing with the same amount when they turn 18, and assuming a CAGR of 12%, could result in a sum of about 3.91 crores by the time the child reaches 60. While mutual funds offer flexibility and can be a good investment for returns, they allow withdrawals anytime.

Some child-specific mutual funds have a five-year lock-in period, showing the choice between flexibility and controlled investment. Similarly, the Public Provident Fund (PPF) has a lock-in period of 15 years and currently offers an interest rate of 7.1%, reviewed every three months. The NPS Vatsalya scheme presents an attractive investment option for securing your child’s future, using the power of equity and compounding.

Spreading investments across NPS Vatsalya, mutual funds, and PPF could provide a balanced approach for future financial goals such as education and marriage, while also building a solid foundation for retirement. By including the NPS Vatsalya scheme in your financial planning, you can introduce your child to disciplined saving and investment practices early on, allowing them to build substantial wealth for their future needs.

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