Union Budget 2024: What is NPS Vatsalya scheme that Sitharaman announced in her speech; who can open account and what can be its benefit?

Union Budget 2024: National Pension System (NPS) is a market-linked retirement scheme where one can start investing at the age of 18 and can invest up to the age of 70. But now the government wants to open the scheme to children. In her budget account, finance minister Nirmala Sitharaman announced NPS-Vatsalya, which she describes as a plan for contributions by parents and guardians for minors.

Ranbheer Singh Dhariwal, Chief Executive Officer, Max Life Pension Fund Management, said: “The Union Budget's introduction of the National Pension Scheme (NPS) Vatsalya is a commendable step forward in promoting retirement savings and fostering long-term financial security. 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."

Here's what we know so far about NPS Vatsalya: who is eligible for it, who can apply, and what will happen to one's account after attaining maturity. Know your answers here-

What is NPS?

NPS is a retirement scheme where one contributes money at least once in a financial year.

NPS is linked to the market, where one can select the fund scheme and percentage of equity exposure.

Based on the performance of the assets in their fund, the NPS accountholder gets a lump sum amount at retirement and the option to purchase an annuity for a monthly pension.

At the retirement age of 60 years, one gets the option to withdraw up to a maximum of 60 per cent of their retirement corpus and purchase the annuity from the rest of their 40 per cent corpus.

In this way, their retirement amount becomes tax-free. 

Why is NPS Vatsalya different then?

Unlike in NPS, where one can open an account at 18 years old, in NPS Vatsalya, a parent or guardian can open an account for a minor.

The finance minister didn't reveal the minimum age of the minor in such a case. 

What will happen to their account on maturity?

The finance minister says that upon attaining the age of majority, the NPS Vatsalya plan can be seamlessly converted into a normal NPS account. 

How will NPS Vatsalya benefit?

Since NPS offers compound growth, NPS Vatsalya account holders will get years of compounding.

After being converted into a full NPS account, the accountholder can accumulate a substantial amount by the time they attain the retirement age of 60.