NPS for children: Key rules and estimated corpus by the time your child turns 18

If you’re planning for secure future goals such as higher education, overseas studies, or helping your child become financially independent, the NPS Vatsalya plan might be best suited to your investment portfolio since the scheme is government-backed and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). 

NPS Vatsalya, the child-focused version of the National Pension System (NPS), allows parents or legal guardians to start investing for a minor from an early age.

Being a tax-efficient scheme, National Pension System (NPS) Vatsalya delivers market-linked returns dependent on pension funds’ performance, 24/7 online access to the account, the power of compounding, and financial stability. 

Key rules

Here are the key rules of NPS Vatsalya, comprising eligibility, contribution, and more.

Eligibility

Any Indian citizen under the age of 18, including OCI and NRIs, can open an account. Parents and guardians have two options for opening the NPS Vatsalya Permanent Retirement Account (PRA): -Online: eNPS or App/portals offered by Points of Presence (PoPs)/CRAs; -Offline: Points of Presence (PoPs). 

Contribution rules

Minimum contribution for account opening is Rs 250, whereas the minimum annual contribution is capped at Rs 250. Parents/guardians can pick any one pension fund (PF) authorised with the PFRDA to manage the NPS Vatsalya account on behalf of their child. 

There is no limit on the maximum contribution and the scheme allows gift contributions by relatives or friends.

Documentation

Minor’s DoB Proof: Birth Certificate / School Leaving Certificate / Matriculation Certificate / PAN / Passport – Anyone

Guardian’s KYC: Aadhaar/Driving License/Passport/Voter ID/MGNREGA Job Card/NPR – Anyone and PAN/Form 60.

In unfortunate cases of death

The guardian, nominee, or legal heir receives the whole corpus in the event of the subscriber’s death. It is also possible to transfer the funds to the guardian, nominee, or legal heir’s NPS account. 

In the event that a guardian passes away, the new guardians must register by providing the required KYC paperwork.

The legally designated guardians may maintain the account with or without contributions in the event of the death of both parents. 

What are the withdrawal and exit rules before and after the child turns 18?

Before the child turns 18, partial withdrawals are allowed, subject to these conditions:

• The account must have completed at least 3 years from the date of opening.
• Withdrawal is permitted only for:
  • Education of the minor child
  • Treatment of specified illnesses of the minor child
  • Disability exceeding 75% of the child of the minor child

• Up to 25% of the contributions made (excluding investment returns) can be withdrawn.

• A maximum of 2 partial withdrawals can be made before the child reaches 18 years.

After the child turns 18

Once the subscriber becomes a major:

1. Fresh KYC must be submitted. Until KYC is completed, withdrawals are not permitted

2. Between 18 and 21 years, the subscriber can make 2 additional partial withdrawals (subject to KYC completion)

The maximum withdrawal is capped at 25% of the total contributions made to the account. Once the child attains the age of 18, the NPS Vatsalya account is automatically converted into a regular NPS Tier-I account. The beneficiary can either continue the account or choose to exit the scheme. 

If the accumulated corpus is Rs 2.5 lakh or less, the beneficiary can withdraw 100% of the amount. However, if the corpus exceeds Rs 2.5 lakh, at least 80% of the accumulated corpus must be used to purchase an annuity plan, while the remaining 20% can be withdrawn as a tax-free lump sum.

Exit options after 18

Rajesh Khandagale, Senior Vice President – NPS, KFin Technologies, says that after KYC completion, the subscriber can

Option 1: Continue in NPS

• Transfer the entire accumulated corpus to the NPS All Citizen Model (or another applicable NPS model).

Option 2: Exit and withdraw corpus

• Up to 80% of the accumulated pension wealth can be taken as a lump sum.
• The remaining balance must be used to purchase an annuity

Option 3: Full withdrawal

• If the total accumulated pension wealth is less than Rs 8 lakh, the entire corpus can be withdrawn as a lump sum

If parents invest Rs 2,000 to Rs 10,000 per month from birth, what corpus can they expect by age 18 under different return assumptions?

Please find the corpus generated over 18 years in the NPS Vatsalya Account for different contributions and different returns. 

Monthly contribution amount in Rs	8% Return	9% Return	10% Return	11% Return	12% Return
2,000.00	Rs 9.67 lakh	Rs 10.81 lakh	Rs 12.11 lakh	Rs 13.60 lakh	Rs 15.31 lakh
5,000.00	Rs 24.16 lakh	Rs 27.02 lakh	Rs 30.28 lakh	Rs 34.01 lakh	Rs 38.27 lakh
7,500.00	Rs 36.25 lakh	Rs 40.53 lakh	Rs 45.42 lakh	Rs 51.01 lakh	Rs 57.41 lakh
10,000.00	Rs 48.33 lakh	Rs 54.04 lakh	Rs 60.56 lakh	Rs 68.01 lakh	Rs 76.54 lakh

Source: KFin Technologies

For NPS Vatsalya, there are no options for Active Choice or Auto Choice. All PFMs have launched Vatsalya Schemes, so the subscriber has a choice between the PFMs for investing.

The guardian making the contribution can avail of the tax benefits as are available on the major NPS Account.

Which investment option—Active Choice, Auto Choice or Default Choice—is best suited for a child with a long investment horizon?

Since the child has a long investment horizon of up to 18 years, the portfolio has the potential to generate higher returns over the long term. Therefore, the Active Choice option may be more suitable for investors seeking higher growth. 

“Under the Active Choice option, investors can allocate a larger portion of the portfolio to equity, which can help maximize wealth creation over the long term, albeit with higher market risk. As the investment horizon is long, short-term market volatility is likely to have a lesser impact on the overall corpus,” said Gibin John, Senior Investment Strategist, Geojit Investments Limited. 

What tax benefits are available on contributions made to a child’s NPS account?

Contributions made by parents or legal guardians to an NPS Vatsalya account are eligible for an additional tax deduction of up to Rs 50,000 per financial year under Section 80CCD(1B) of the Income Tax Act. This benefit is available exclusively under the Old Tax Regime and is in addition to the standard Rs 1.5 lakh limit under Section 80C. 

Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions. 

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