Budget NPS scheme: Finance Minister Nirmala Sitharaman unveiled the NPS Vatsalya scheme during the Budget 2024 address, an initiative focusing on cultivating long-term savings habits for minors.
This scheme, a specialised version of the National Pension System (NPS), that offers parents and guardians the opportunity to kickstart retirement savings for their underage dependents. By opening accounts in the minors’ names and actively contributing to these accounts, parents and guardians can ensure a secure financial future for their children.
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Details on the new scheme are eagerly anticipated from the Finance Ministry. The introduction of a market-linked savings scheme featuring tax benefits to facilitate savings for children has generated initial enthusiasm.
As per experts, a parent or guardian of a minor will have the opportunity to establish an NPS account and make regular contributions. Upon the minor reaching the age of majority, the account will transition into a standard NPS account. Essentially, this account serves as a tool for saving for the minor’s retirement.
“By allowing parents and guardians to initiate their minor child’s NPS account, the initiative sets the foundation for responsible financial management from an early age. As these accounts transition into regular NPS plans upon adulthood, they provide a smooth continuation of savings habits into adulthood,” Ranbheer Singh Dhariwal, CEO of Max Life Pension Fund Management, told the Economic Times.
The National Pension Scheme (NPS) is a government-sponsored retirement savings initiative designed for individuals ranging from 18 to 70 years of age, encompassing residents and Non-Resident Indians (NRIs). This program operates as a market-linked contribution plan, providing Indian citizens with a structured method to accumulate funds for their retirement while offering advantageous tax incentives.
Tax benefits currently available with the NPS
The tax deduction for contributions made by the employer under Section 80 CCD(2) can be up to 10% of the employee’s salary (Basic + Dearness Allowance). However, if the Central Government makes such contributions, the deductible limit increases to 14%. This deduction is available over and above the Rs. 1.5 lakh limit specified under Section 80 CCE for tax-saving investments.
The current adoption rate of the NPS stands at 10-15% within the corporate sector. Many individuals face challenges when attempting to allocate savings towards retirement plans, often hindered by high expenses and short-term financial objectives. It may be unrealistic to expect individuals who are not prioritising their own retirement savings to allocate resources toward planning for their children’s long-term financial security.
One key feature of the scheme is its flexibility. When the minor reaches 18 years of age, parents can choose to convert the account into a regular NPS (National Pension System) account. This allows for a smooth transition into long-term retirement planning.
CA Swapnil Patni said: “The unique thing about the scheme is that it is designed in such a way that it can be converted into a non-NPS plan once the child attains the majority. we look forward to its upcoming progression in supporting parents and securing the future of the younger generation.”
Sandeep Chilana, Managing Partner at CCLaw, said: “Early schemes for planning social security and pension benefits of the next generation is a welcome step. It would be important that necessary checks and balances are put in place to ensure that parents’ savings do not get out of their control immediately on a child becoming a major.”