Here's how NPS Vatsalya can grow your child’s future fund

NPS Vatsalya Scheme: Finance Minister Nirmala Sitharaman recently launched the NPS Vatsalya scheme, an initiative aimed at helping parents secure their children’s future through a structured pension investment plan. Here’s how this scheme works and how it can potentially help you amass a substantial corpus for your child's future.

What is the NPS Vatsalya scheme?

The NPS Vatsalya scheme is a savings-cum-pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows parents to open a pension account for their minor children, ensuring a disciplined and rewarding investment path that can grow significantly over time.

Core NPS Vatsalya details

Subscription Options

Parents can subscribe to NPS Vatsalya either online via the NPS Trust's eNPS platform or through physical modes at Point of Presence (POPs) like banks, post offices, and other authorised entities.

Minimum Contributions

The minimum contribution to open an NPS Vatsalya account is Rs 1,000. After the initial deposit, a minimum annual contribution of Rs 1,000 is required.

Eligibility

All minor citizens (up to 18 years) are eligible to be beneficiaries. The account is operated in the name of the minor but managed by a guardian.

Investment Choices

The NPS Vatsalya scheme offers a range of investment choices to suit different risk appetites and preferences. For those opting for the Default Choice, the scheme provides the Moderate Life Cycle Fund LC-50, which allocates 50 per cent to equity. 

The Auto Choice includes three options: Aggressive LC-75, which invests 75 per cent in equity; Moderate LC-50, which maintains a 50 per cent equity allocation; and Conservative LC-25, which limits equity exposure to 25 per cent. 

Additionally, the Active Choice allows guardians to actively manage the allocation of funds across various asset classes, including Equity (up to 75 per cent), Corporate Debt (up to 100 per cent), Government Securities (up to 100 per cent), and Alternate Assets (up to 5 per cent). This flexibility helps tailor investments according to individual risk profiles and financial goals.

Smooth age transition

Upon reaching the age of 18, the NPS Vatsalya account transitions seamlessly to an NPS Tier-I account under the All Citizen model. This transition is smooth and automatic, but the minor will need to complete fresh KYC formalities within three months of turning 18. After the transition, the account will adhere to the rules and benefits applicable to NPS Tier-I accounts, which include tax benefits, pension accumulation, and specific withdrawal norms.

To build wealth through the NPS Vatsalya scheme, consistent contributions combined with prudent investment choices are key. Regular investments, even as modest as Rs 1,000 annually in a balanced fund, can significantly grow over time, especially with a moderate return rate. 

This disciplined approach allows the corpus to build substantially by the time the child reaches adulthood. Additionally, contributions to NPS Vatsalya qualify for tax benefits under Section 80C of the Income Tax Act, adding to the scheme’s appeal. 

The potential for high returns from equity investments and the benefits of compounding further enhance the scheme’s capacity to accumulate a considerable financial reserve for future needs.

Factors affecting the final amount

The final amount accumulated through the NPS Vatsalya scheme is influenced by several key factors. Firstly, the rate of return plays an important role; higher returns from equity investments can notably enhance the corpus over time. 

Secondly, additional contributions can further increase the final amount; consistently boosting annual contributions helps to grow the fund more substantially. 

Lastly, the investment duration is vital; longer investment periods benefit from greater compounding effects, leading to a larger accumulated amount by the time the child reaches adulthood. These factors collectively determine the growth and final value of the NPS Vatsalya account.