Everyone wants their children’s future to be secure. Therefore, parents make arrangements for adequate financial protection while their children are still young.
Many existing schemes are available for this purpose, and the central government has recently introduced another scheme called the National Pension Scheme (NPS) in Vatsalya.
This scheme involves opening a retirement account in the name of children and gifting them a substantial fund.
Traditionally, retirement plans are made after employment. However, starting planning for life after 60, suitable from birth, is essential. This is where NPS Vatsalya comes into play.
Who can open this account?: Parents and guardians of children below 18 can open this account. The minimum required amount is Rs. 1,000 annually, and no maximum limit exists.
What documents are required?
- Verification of Date of Birth.
- KYC (Know Your Customer) verifications for parents/ guardians/
- PAN / Form 60.
NPS Vatsalya Account Online and Offline Application Process: NPS Vatsalya accounts can be opened online and offline. Several banks, including ICICI Bank, Axis Bank, and others, have partnered with the Pension Regulatory and Development Authority (PFRDA) to offer this scheme. Accounts can also be opened at post office branches.
Why choose NPS Vatsalya? Investing in Vatsalya at a young age can continue for a long time, leading to substantial returns. With the benefit of compound interest, a significant amount can accumulate by the time the child retires, providing financial security in old age. This also helps instill the habit of saving in children and teaches them the importance of long-term investments.
After 18 years: According to PFRDA, when the children reach the age of majority, i.e., after turning 18, this account will be converted into a regular NPS Tier-1 account. Then, options such as auto choice and active choice can be selected for this account. KYC norms must be completed within three months of reaching adulthood.
Can funds be withdrawn? After three years of opening the account, while the children are minors, up to 25 % of the accumulated funds can be withdrawn for purposes such as education or critical illness.
However, as the account becomes a regular NPS after 18, the withdrawal rules change. If the fund exceeds Rs. 2.5 lakhs, 20 % can be withdrawn, and the remaining 80 % will have to be invested in annuity schemes.
If the deposit amount is less than Rs. 2.5 lakhs, the entire amount can be withdrawn at once. In the event of the account holder’s death, the entire amount is returned to the parent/guardian or nominee.
Revenue Estimates: Let’s consider an example to see the returns on investing in NPS Vatsalya:
Parents open an NPS Vatsalya account when their child is born and invest Rs. 10,000 annually for 18 years at an average return of 10 %. When the child turns 18, a Rs. 5 lakh fund will be accumulated. If left undisturbed:
- Rs. 2.75 crores by the time the child attains the age of 60 years with an estimated annual return of 10 %
- Rs. 5.97 crores by the end of 60 years with an estimated annual return of 11.59 %
- Rs. 11.05 crores by the end of 60 years, with an estimated annual return of 12.86 %.
Note: The return estimates are for informational purposes only.