In a bid to secure the future of children, the government has introduced a new scheme called NPS Vatsalya, specifically designed for children under 18 years of age. This has stirred up interest, especially among parents who are already familiar with long-term investment plans like Public Provident Fund (PPF). Now, with two strong options available, it’s essential to understand which scheme suits your child’s future needs better.
What is NPS Vatsalya?
NPS Vatsalya is an extension of the National Pension Scheme (NPS), traditionally meant for individuals over 18 years. Now, children below 18 can have an NPS account opened by their parents, allowing them to build a substantial fund over time. The core feature of the NPS Vatsalya scheme is its focus on securing a pension for the child when they grow up. Parents can start with a minimum contribution of ₹1,000 per year, and there is no upper limit on how much they can invest.
In NPS Vatsalya, the deposited amount can be partially withdrawn for education or medical treatment once the account has been active for at least three years. Upon reaching 18 years, 20% of the total fund can be withdrawn, while the remaining 80% will be converted into an annuity, which ensures a steady pension for the child in the future.
Understanding PPF
The Public Provident Fund (PPF) is one of the most popular long-term investment options in India. It offers guaranteed returns and is preferred by people who want to secure a stable amount for their child’s future. The PPF scheme has a lock-in period of 15 years, but this can be extended in blocks of 5 years. It allows investments starting from ₹500 annually and offers a fixed interest rate, currently at 7.1% per annum.
Key Differences Between NPS Vatsalya and PPF
- Interest Rates and Returns:
- NPS Vatsalya offers an interest rate of around 10% per annum as it is linked to equity returns. This means there’s potential for higher growth but also some fluctuations based on market performance.
- PPF, on the other hand, provides 7.1% fixed interest, offering safe and stable returns without any risk from market volatility. The interest rate is reviewed by the government every quarter.
- Investment Amount:
- In NPS Vatsalya, parents need to invest at least ₹1,000 per year, and there is no limit on the maximum amount.
- For PPF, the minimum yearly investment is ₹500, and the maximum limit is ₹1.5 lakh per financial year.
- Type of Scheme:
- NPS Vatsalya is essentially a pension scheme, where a large portion of the investment is meant for generating regular income in the form of a pension when the child becomes an adult.
- PPF is a pure investment scheme with a fixed tenure of 15 years. After the maturity period, the entire accumulated amount can be withdrawn without any further obligations.
- Withdrawal Rules:
- In NPS Vatsalya, 25% of the amount can be withdrawn after 3 years for specific needs like education or healthcare. Upon maturity at age 18, 20% can be taken as a lump sum, and the remaining 80% must be invested in an annuity.
- In PPF, the full amount can be withdrawn after 15 years, or the scheme can be extended in blocks of 5 years. Partial withdrawals are allowed after 7 years for specific purposes.
- Tax Benefits:
- Both NPS Vatsalya and PPF offer tax benefits under Section 80C of the Income Tax Act. The contribution in both schemes can help reduce taxable income by up to ₹1.5 lakh per year.
- The returns from PPF are fully tax-exempt, while in NPS, a portion of the maturity corpus is taxable when the child opts for an annuity.
Which Scheme Offers Better Returns?
Let’s take an example to understand the potential returns in both schemes. If a parent invests ₹1,000 per month in both NPS Vatsalya and PPF for 15 years, the accumulated corpus will vary due to different interest rates.
- In NPS Vatsalya, assuming an annual return of 10%, the total investment of ₹1.80 lakh will grow to approximately ₹4.20 lakh after 15 years. Of this, ₹84,000 can be withdrawn, and the rest will generate a regular pension.
- In PPF, with a 7.1% return, the total amount will be around ₹3.22 lakh after 15 years, which can be withdrawn entirely after the lock-in period.
Flexibility in Terms of Investment Duration
- NPS Vatsalya does not have a fixed tenure. While the funds can be accessed when the child turns 18, the scheme can continue until they are 60 years old, ensuring a long-term financial cushion.
- PPF has a 15-year lock-in period, but it can be extended in 5-year blocks if parents want to continue their investment beyond the initial term.
NPS Vatsalya or PPF: Which One Should You Choose?
Choosing between NPS Vatsalya and PPF depends on the financial goals of the parents. If the focus is on securing a pension for the child with potentially higher returns, NPS Vatsalya might be the better option. However, for those who prefer a risk-free investment with guaranteed returns and complete withdrawal at maturity, PPF remains a solid choice.
Parents looking for a blend of growth and security may also consider investing in both schemes to balance risk and return while ensuring their child’s future financial stability.
