The National Pension System (NPS) Vatsalya is a new pension scheme designed to help parents secure the financial future of their children. Parents or guardians can open an NPS Vatsalya account and contribute regularly to build a fund that their child can benefit from when they reach adulthood. While the scheme appears promising at first glance, several factors could make it less appealing compared to other investment options for your child’s future.
If you are considering the NPS Vatsalya scheme for your child, it’s essential to weigh these potential drawbacks before making a decision.
1. Limited Liquidity Options
One of the main concerns with NPS Vatsalya is the lack of flexibility in terms of withdrawals. According to the rules, parents can only withdraw up to 25% of the total amount for specific purposes such as education, severe illness, or disability. And even then, withdrawals are limited to just three times before the child turns 18.
This restriction can be a significant disadvantage if you face an unexpected need for a large sum of money, whether for your child’s education, medical emergencies, or other urgent expenses. Other financial products, like mutual funds or fixed deposits, often provide greater liquidity, making them more suitable if you anticipate needing access to your funds sooner.
2. Rigid Withdrawal Rules After Age 18
Once your child turns 18, they have two options: withdraw from the scheme or continue it as a regular NPS Tier-I account. However, even if the child decides to withdraw, if the accumulated amount exceeds ₹2.5 lakh, only 20% of the total sum can be withdrawn. The remaining 80% must be invested in an annuity.
This can be problematic if you require a large sum for major expenses like higher education or marriage. The scheme’s rigid withdrawal structure defeats the purpose of saving for significant milestones in your child’s life.
3. Uncertainty Regarding Tax Benefits
Investments in a regular NPS account come with specific tax benefits, allowing investors to save up to ₹1.5 lakh annually under Section 80C and an additional ₹50,000 under Section 80CCD(1B). However, the NPS Vatsalya scheme’s tax benefits are still unclear, leaving potential investors in the dark about whether they can enjoy similar tax advantages.
For parents looking to maximize tax savings while securing their child’s financial future, this ambiguity may be a cause for concern, especially when there are other investment products available that provide clear and attractive tax benefits.
4. Low Equity Allocation for Long-Term Growth
NPS Vatsalya offers two investment options: Auto Choice and Active Choice. While both options provide some equity exposure, the maximum equity allocation is capped at 75%. Experts argue that for an investment with an 18-year lock-in period, the equity exposure is too low to generate substantial returns in the long run.
With inflation and rising educational costs, the potential growth from a 75% equity allocation may not be enough to meet future financial needs. Parents looking for higher returns might consider alternatives like equity mutual funds, which allow for greater exposure to the stock market and typically generate better long-term results.
5. Extremely Long Lock-In Period
The NPS Vatsalya scheme has one of the longest lock-in periods compared to other child-centric financial products. The account remains locked until the child turns 18, and even then, if the account is converted to a regular NPS Tier-I account, the lock-in period continues until the age of 60.
While partial withdrawals are allowed after three years, they are still subject to strict limitations. This extended lock-in period may not be ideal for parents who need flexible financial planning options. Products like Sukanya Samriddhi Yojana (SSY) or Public Provident Fund (PPF) offer better liquidity and more favorable terms, making them better choices for some families.
Is NPS Vatsalya Right for Your Child?
While NPS Vatsalya offers a structured way to save for your child’s future, its lack of flexibility, extended lock-in periods, and rigid withdrawal rules may not make it the most suitable option for every parent. Exploring other financial products with better liquidity, higher equity exposure, and clearer tax benefits may provide more comprehensive solutions for your child’s financial security.
