Launched on September 18, 2024, NPS Vatsalya was aimed at being an extension of the existing NPS system. While NPS catered predominantly to the employed section of the society, NPS Vatsalya allowed parents/ guardians to create and initiate retirement savings even for their minor children, while being regulated and administered by PFRDA as in the case of the traditional NPS. 

While alternatives exist in the form of Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY), none of them are market-linked investments. And considering the long-term compounding machine that equity is, NPS Vatsalya made a case as a relatively riskier but promising scheme. Also, the concept of allowing the minor to convert the account to a regular NPS tier-1 account after attaining 18 years of age, gives a long leeway to generating a substantial corpus.

Despite being the only market-linked investment amidst the alternatives, NPS Vatsalya, when compared, ranked lower in terms of tax efficiency, as the investments in PPF and SSY enjoyed tax deduction, while NPS Vatsalya did not make that cut. Since it did not carry tax benefits, equity mutual funds were also options that parents could choose instead of this.

The much-needed reform

Housed under section 80CCD (1B) of the Income Tax Act, the taxman introduced, effective April 2016, an additional allowable deduction of a maximum of ₹50,000 for investments made in NPS, over and above the blanket deduction of ₹1.5 lakh allowed under section 80C. And since NPS Vatsalya was not recognised as a tax-saving investment, the investments made into the same could not be used as a tax-shield.

Finance Bill 2025 brought in the much-needed tweak bringing investments in NPS Vatsalya into the ambit of deductions, which is available only under the old tax regime.

Now, while any withdrawal of such amount contributed to the minor’s account for which the tax benefit was availed would become taxable and clubbed with the parent/ guardian’s taxable income, there are some exceptions. Partial withdrawal from the minor’s NPS account to address certain contingency situations such as education, treatment of specified illnesses and disability (of more than 75 per cent), provided the same does not exceed one-fourth of the contributions made, will not be clubbed.

Please note that NPS Vatsalya already allowed for a partial withdrawal of up to 25 per cent of contribution for the above-specified reasons, for a maximum of three times till the subscriber attained 18 years of age, while the tax implications were ambiguous.

Also, in the unfortunate scenario of the death of the minor, resulting in closure of the account in respect of which tax benefits had been allowed earlier, the amount received from such NPS account of the minor shall not be deemed to be the income of the parent or guardian.

With the above tweaks and clarifications, in addition to the existing features (we had highlighted the same in our bl.portfolio edition dated September 29, 2024), NPS Vatsalya makes a more compelling case for being a savings-cum-investment vehicle pertaining to minors. With the applicability of this scheme coming in from FY25, taxpayers going for the old tax regime could give this scheme a re-look now.

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