NPS Vatsalya

Retirement planning has one input nobody can buy later: time. NPS Vatsalya is the scheme built to hand a child forty extra years of it.

The workbook's description is compact. NPS Vatsalya is a saving-cum-pension scheme introduced in Budget 2024 for minor citizens. Any parent can open the account in the name of their minor children (below 18 years) and operate it as a guardian. The account is subject to all the regulations of an NPS Tier 1 account managed by PFRDA. Once the minor turns 18, the account is maintained by him or her like any other individual NPS account.

So it is not a new product. It is the existing NPS Tier 1 architecture, opened a couple of decades early.

The deduction for the parent. Pursuant to the amendment by the Finance Act, 2025, a contribution made to the NPS Vatsalya account of a minor by a parent or guardian is allowed as a deduction to the parent or guardian under section 80CCD(1B), subject to the overall Rs 50,000 limit of that section.

That limit is shared. The workbook is explicit that the additional Rs 50,000 deduction covers contributions by an individual to his own NPS account or to an NPS Vatsalya account. It is one Rs 50,000, not two.

But it sits outside the Rs 1,50,000 ceiling of sections 80C, 80CCC and 80CCD(1). The total NPS-related deduction for an individual can therefore reach Rs 2,00,000.

Partial withdrawal. The scheme permits partial withdrawal from the minor's account. A new clause 10(12BA) provides that income received on such a partial withdrawal is exempt in the hands of the parent or guardian to the extent it does not exceed 25% of the amount of contributions made by him, in accordance with the PFRDA Act, 2013 and the regulations under it.

Closure and death. On closure of the account or on opting out of the pension scheme, the amount standing to the credit will be taxable. Where the amount is received on the death of the minor, it is not taxable.

Mr and Mrs Deshpande have one child, aged 4. Mr Deshpande already contributes Rs 50,000 a year to his own NPS account and claims it under section 80CCD(1B). He now opens an NPS Vatsalya account for the child and contributes Rs 50,000 to that as well.

The deduction. He does not get Rs 1,00,000. The additional deduction under 80CCD(1B) is Rs 50,000 in total, covering his own NPS account and the Vatsalya account together. His deduction stays at Rs 50,000.

So Mrs Deshpande opens it instead. She has no NPS account of her own. Her Rs 50,000 into the child's Vatsalya account is deductible under 80CCD(1B) in her hands — and it sits above her Rs 1,50,000 section 80C limit. At a 30% slab plus 4% cess, that is Rs 15,600 of tax saved each year.

The reason for doing it at all. Rs 50,000 a year contributed from age 4 to age 18 is Rs 7,00,000 of contributions. Left in the account and compounded at an illustrative 10% to the child's age 60, that corpus is worth well over Rs 2 crore — and the child has not contributed a rupee of her own.

The withdrawal rule in practice. Suppose Rs 7,00,000 has been contributed and Rs 1,50,000 is partially withdrawn for the child's education. 25% of contributions is Rs 1,75,000, so the whole Rs 1,50,000 is exempt. Withdraw Rs 2,50,000 instead, and only Rs 1,75,000 falls inside the exemption.

Chapter 5 (Retirement Products), section 5.1.8, introduces the scheme; Chapter 12 (Taxation of Other Products) supplies the 80CCD(1B) deduction, clause 10(12BA) and the summary table of NPS taxability. Expect a factual question on who may open the account and what happens at 18, and a deduction question that tests whether the Rs 50,000 is shared with the parent's own NPS contribution — it is.

• The Rs 50,000 under 80CCD(1B) is shared between the individual's own NPS account and the NPS Vatsalya account. Two accounts do not mean two deductions.
• It sits outside the Rs 1,50,000 limit of sections 80C/80CCC/80CCD(1), which is how the total reaches Rs 2,00,000.
• The deduction belongs to the contributing parent or guardian, not to the minor.
• Closure or opting out is taxable; death of the minor is not. The two outcomes are treated oppositely.
• Partial withdrawal is exempt only up to 25% of the contributions made — not 25% of the corpus.
• At 18 the account becomes an ordinary individual NPS account. It is not closed and not paid out.
• It is a Tier 1 account, with all of Tier 1's regulations — not a flexible savings account.