As India increasingly emphasizes financial literacy and future security, the NPS Vatsalya Scheme, launched in 2024, emerges as a unique investment avenue for parents seeking to build a retirement corpus for their children—right from their early years. Beyond its long-term savings potential, this scheme offers attractive tax benefits under the Income Tax Act, making it a compelling option under the old tax regime.
In this post, we’ll decode the tax treatment of NPS Vatsalya and how parents or guardians can make the most of it.
🧒 What is NPS Vatsalya?
NPS Vatsalya is a child-focused extension of the National Pension System. It allows a parent or guardian to open an NPS account on behalf of a minor child (under 18 years). Contributions made to this account accumulate over decades, ensuring a financially stable retirement for the child.
💸 Tax Benefits of NPS Vatsalya
Let’s dive into how the scheme is treated from a tax perspective:
✅ 1. Deduction under Section 80CCD(1B)
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Contributions made to the child’s NPS Vatsalya account are eligible for a tax deduction of up to ₹50,000 per financial year.
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This is in addition to the ₹1.5 lakh deduction available under Section 80C.
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Important: This deduction is only available under the old tax regime.
🔁 2. Shared Deduction Limit
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If a parent contributes to both their own NPS account and the child’s NPS Vatsalya account, the combined deduction limit under Section 80CCD(1B) remains ₹50,000.
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This means the benefit cannot be claimed twice—it’s a cumulative limit.
📤 3. Tax Treatment on Withdrawal and Maturity
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Upon the child’s retirement age (60 years), the account matures.
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At that point:
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60% of the corpus can be withdrawn tax-free.
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The remaining 40% must be used to purchase an annuity, which will provide pension income taxable in the hands of the child as per their slab rate.
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💊 4. Partial Withdrawals – Tax-Free in Specific Cases
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Partial withdrawals (up to 25% of the contributions) are allowed for reasons such as:
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Higher education
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Treatment of critical illness
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Disability
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These withdrawals are not taxed, provided they meet the specified conditions.
👨👩👧 Who Can Open NPS Vatsalya?
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Indian citizens who are parents or legal guardians of a minor child can open the account.
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Once the child turns 18, the account ownership shifts to them, and they can continue contributions.
💼 Investment and Contribution Rules
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Minimum Contribution: ₹1,000 per year
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No maximum limit, but tax benefit caps apply
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Offers flexible investment options—default, auto, or active choice
📌 Final Thoughts: Is NPS Vatsalya Right for You?
For long-term planners and parents looking to combine future security with present tax savings, NPS Vatsalya is a powerful tool. While the long lock-in period might seem like a drawback, it’s precisely what makes the scheme ideal for retirement-focused compounding.
Moreover, in a tax environment where benefits under the old regime are increasingly precious, this is one deduction you shouldn’t miss—especially if you're already inclined toward disciplined investing.
💬 Have questions or want to learn how to integrate NPS Vatsalya into your financial planning? Leave a comment or connect with us for a personalized consultation.
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