The National Pension Scheme (NPS) Vatsalya was launched to help parents secure their children’s future financially. It offers an early start in investing in pension funds for children, encouraging financial discipline from a young age. On the surface, this sounds like a great way to prepare for important milestones like higher education or marriage. But is this scheme truly suitable for covering large expenses in the future?
Experts have raised concerns about several aspects of the NPS Vatsalya scheme. Let’s explore these issues in detail to help you decide if it’s the right investment choice for your child’s needs.
1. Limited Investment in Equity
A significant downside of the NPS Vatsalya scheme is its restriction on equity investments. Under the two available options—Auto Choice and Active Choice—you can only invest up to 75% of the funds in equities. For long-term financial growth, especially when planning for expenses like education and marriage, 100% equity exposure is often considered a better option due to the higher returns that equities typically offer over time.
This cap on equity investments limits the potential growth of the corpus, which could be a disadvantage when aiming for substantial financial goals like paying for a child’s college education or funding their wedding.
2. Pension Starts at Age 18—When Expenses Are Highest
One of the biggest challenges with NPS Vatsalya is that the pension begins at 18, an age when parents often need a lump sum for their child’s higher education. When your child turns 18, you have two options: withdraw the entire amount, or convert it into a regular NPS Tier-1 account. However, if you choose to withdraw, only 20% of the amount is given in a lump sum, while the remaining 80% is used to buy an annuity, meaning your child will receive a monthly pension.
If the amount accumulated by age 18 is less than Rs 2.5 lakh, only then can the full amount be withdrawn. This setup may not align with the immediate financial needs for higher education, where a lump sum is often required.
3. Limited Flexibility in Withdrawals
NPS Vatsalya lacks the flexibility that many parents would prefer in an investment plan for their child’s future. The scheme is designed primarily as a retirement product, and parents can only make partial withdrawals up to three times. Moreover, withdrawals are capped at 25% of the total contribution, and this is allowed only for specific reasons like education, severe illness, or disability.
The scheme’s restrictions make it difficult to use the funds freely when they are most needed, such as when your child turns 18 and requires money for higher education or other major life events.
4. Low Withdrawal Threshold at Maturity
Another area where NPS Vatsalya falls short is the withdrawal limit. If your child’s accumulated corpus at 18 years is Rs 3 lakh, only Rs 60,000 will be given as a lump sum, while the rest will be used to buy an annuity. This amount may not be sufficient to cover the significant costs of education or marriage.
In contrast, the regular NPS allows for the full withdrawal of the corpus if the amount at maturity is less than Rs 5 lakh. A similar provision could have made NPS Vatsalya more appealing.
5. Long Lock-in Period
The lock-in period under the NPS Vatsalya scheme is another issue that could deter parents. The funds are locked until the child reaches the age of 18, which might seem reasonable for a retirement scheme but not for an education or marriage planning tool.
If the child continues with a Tier-1 NPS account after 18, the lock-in continues until they turn 60. For someone aiming to use this money for key life milestones like education, this long lock-in period could be highly restrictive.
6. Lack of Liquidity for Major Expenses
A critical flaw in the NPS Vatsalya scheme is the lack of liquidity for major expenses that arise after the child turns 18. While partial withdrawals are allowed up to the age of 18, most significant expenses, such as higher education or marriage, typically come after that age.
Since withdrawals are limited, and most of the accumulated corpus is directed towards an annuity, the scheme may not provide the necessary funds when parents need them most.
7. Tax Clarity Still Unclear
The tax benefits under the NPS Vatsalya scheme are another area of concern. Unlike the regular NPS, where the tax structure is clear and follows the EET (Exempt-Exempt-Taxed) model, there is still no clarity on how NPS Vatsalya will be taxed. Parents need to understand the tax implications of their investment to make informed decisions.
Given the lack of clear information on this front, potential investors may hesitate to commit to the scheme without fully understanding the tax benefits or liabilities.
In Summary: Weighing the Pros and Cons
While the NPS Vatsalya scheme aims to help parents plan for their children’s future, several factors limit its effectiveness in covering major expenses like education and marriage. From restrictions on equity investments to the long lock-in period and limited withdrawal options, parents may find it challenging to use this scheme for their children’s real-life financial needs.
Before investing in NPS Vatsalya, it’s crucial to weigh its limitations against other financial products that might offer more flexibility, higher returns, and better support for your child’s future.
