Building a retirement nest egg from birth: How NPS Vatsalya can make money for your kids

When the child turns 18, the Vatsalya account will convert into a regular NPS account, allowing employer contributions when the child starts working.

“NPS has generated very competitive returns since its inception. It has given a compounded annual growth rate (CAGR) of 9.5% to the government sector. For non-government sector, it is 14% in equity, 9.1% in corporate debt and 8.8% in government securities,” Sitharaman said at the launch.

NPS was launched in 2004 for government employees and in 2009 for non-government employees.

NPS for kids

Parents or guardians can open Vatsalya account for their children by providing essential documents such as Know Your Customer, the child’s birth certificate, and proof of identity. One can open it via banks, pension fund houses or the e-NPS portal. The money will remain locked for the child until he turns 60. He can withdraw 60% of it tax-free after his retirement while 40% will convert into annuities. Notably, parents’ contribution to NPS Vatsalya will not offer them any tax relief as it is for contribution into regular NPS under section 80-C of the Income Tax Act.

So far as partial withdrawals are concerned, up to 25%of the corpus can be withdrawn for specific purposes, including education, medical treatment for certain illnesses, or disabilities. One can withdraw up to a maximum of 3 times during the entire tenure of your NPS account.

Should you subscribe to NPS Vatsalya?

Given the equity component in NPS, the wealth accumulation opportunity is attractive. One can invest up to 75% in equities, while the rest is deployed into corporate bonds and government securities. Parents can divide the contribution among three asset classes based on their risk appetite.

Assume you invest ₹1,000 per month for your 10-year-old child. Your yearly contribution will be ₹12,000. Consider the child continues the same investment value once she turns 18. Assuming a CAGR of 12%, the child will have ₹3.91 crore by the time she turns 60.

Why NPS Vatsalya and not mutual funds?

Mutual funds are equally good from a returns perspective. They allow you freedom, allowing withdrawal of funds anytime. Some child-specific MFs come with a lock-in period of five years.

The choice is between freedom of withdrawal and a controlled investment option. Choose one that you deem fit for your child once she turns an adult.

Also Read: When should you sell your mutual fund investments? Experts weigh in.

What about the good old public provident fund?

Public Provident Fund has a lock-in period of 15 years. A maximum of ₹1.5 lakh can be invested here. The interest rate, which is 7.1% currently, is reviewed every quarter.

Mint take: With NPS Vatsalya, the government has offered an attractive investment option to secure the future of your child. The child can experience the power of equity and the magic of compounding early on. Choose mutual funds or PPF for your child’s education and wedding goals. A small diversification in NPS Vatsalya could be a great head start to introduce your child to financial education, and at the same time accumulate wealth for them.

Also Read: How a 55-year-old Bhopal architect built ₹2 crore NPS retirement corpus