Planning For Tomorrow: Ensuring Financial Stability Through The NPS Vatsalya Scheme- 2024

Policy Update
Sarah Ansari

Introduction

India has a long tradition of implementing social welfare programs to cater to the varied needs of its population. The NPS (National Pension Scheme) Vatsalya, recently announced in the Union Budget 2024-25, is a notable initiative aimed at helping guardians and parents secure their child’s financial future. It is set to launch in the third week of September 2024. This specially designed, long-term savings solution grows in tandem with your child, providing a stable foundation for their future goals and aspirations.

It is open to all parents and guardians, regardless of their residency status, including Indian citizens, Non-Resident Indians (NRIs), and Overseas Citizens of India (OCIs). This allows individuals from anywhere in the world to invest in the scheme and ensure a secure future for their children.

Historical Background

Introduced by PFRDA (Pension Fund Regulatory and Development Authority) in 2004 for government employees, the National Pension Scheme (NPS) is a voluntary, defined contribution retirement plan that was later extended to all Indian citizens in 2009, including private-sector workers. The NPS aims to provide a flexible, affordable, and accessible pension framework that ensures sustainable retirement savings. Today, the NPS is readily available and tax-efficient under Section 80CCC and Section 80CCD.

The NPS Vatsalya is a specialized extension of the National Pension Scheme, offering additional social security benefits to vulnerable individuals from disadvantaged backgrounds.

With NPS Vatsalya, parents and guardians can begin building a secure financial future for their children from an early age, with a tailored account that supports their growth until age 18. At that point, the account effortlessly converts into a standard NPS account or a non-NPS plan, providing a continuous savings pathway for their child’s evolving needs.

The Need for NPS Vatsalya

India’s vast and diverse population presents distinct social security challenges, particularly for its minor citizens. As life expectancy increases and traditional family support systems decline, a formal pension system has become essential. However, a significant portion of India’s workforce in the unorganized sector lacks access to retirement benefits, leaving millions vulnerable to poverty and financial insecurity.

The NPS Vatsalya scheme bridges this gap by targeting the most vulnerable populations. As India undergoes economic transformation, it’s crucial that social welfare initiatives like NPS Vatsalya adapt to ensure inclusive growth and protect the most vulnerable citizens.

In summary, the following underscores the multifaceted need for the NPS Vatsalya scheme:

Guaranteed Financial Security for Minors: NPS Vatsalya assists in ensuring that minors have access to the tools and assistance they need to secure their future prospects and well-being by establishing a systematic savings plan.
Government Initiative to Enhance Social Security and Promote Financial Stability Among its Citizens: The government hopes to create a safety net that, via focused and organised financial planning, not only protects but also gives families a sense of empowerment by incorporating such programs into its social security system.
Support for Children’s Education and Future: The scheme strives to gradually build up a sizable corpus that may be used to cover educational costs like books, tuition, and other academic requirements.
Encouraging Financial Inclusion: NPS Vatsalya promotes greater involvement in financial planning by offering a structured and easily accessible method of obtaining financial products. This helps to build a culture of saving and investing for future needs.
Tax Benefits and Incentives: Through lowering the cost of investing, NPS Vatsalya facilitates a more efficient and enticing method of providing financial resources for minors.

Key Features of the NPS Vatsalya

The following are key features of the NPS Vatsalya scheme:

Eligibility: All minor citizens till the age of 18 years are eligible.
Operations: The account is open in the name of the minor. While it is operated by the guardian, the sole beneficiary is the minor.
Where to Open Account: An NPS Vatsalya account can be opened on the online platform (e-NPS) or through various points of presence, such as major banks, India, post, pension funds, et cetera.
Documents Required: The documents required for setting up an NPS Vatsalya account are as follows:

Proof of Date of Birth of the minor (Birth Certificate, School Leaving Certificate, PAN, Passport, Matriculation Certificate)
KYC of guardian by submitting Proof of Identity and Address (Aadhar Card, Driving License, Voter ID Card, Passport, Job Card, National Population Register)
If the guardian is NRI, a solo or joint NRE/NRO bank account of the minor.

Contribution: The opening contribution is a minimum of ₹1000 with no upper limit. The subsequent contributions also follow the same.
Pension Fund Selection: Any pension funds registered with PFRDA can be chosen by the guardian.
Investment Choices:

The following are the investment choices:

Default Choice: Moderate Life Cycle Fund, LC-50 with 50% equity.
Auto Choice: Lifecycle Fund, Aggressive, LC-75 with 75% equity, Moderate Life Cycle Fund, LC-50 with 50% equity, or Conservative, LC-25 with 25% equity can be chosen by the guardian.
Active Choice: Allocation of funds across Equity up to 75%, Corporate Debt upto 100%, Government Securities upto 100% and Alternate Asset upto 5% is actively decided by the guardian.

Benefits

The following outlines the several advantages offered by the NPS Vatsalya scheme:

Fosters Early Savings Habits: Encourages parents to start saving and investing for their children from a young age, instilling a lifelong habit of financial discipline and responsibility.
Long-term Wealth Creation: Allows contributions to start early, enabling significant accumulation of wealth over several decades until retirement age, leveraging the power of compounding.
Seamless Transition: Automatically converts to a standard NPS account when the child turns 18, enabling independent management and contributions, and ensuring continuity of the investment.
Portability: Offers flexibility, allowing the account holder to switch jobs or locations without affecting the NPS account, ensuring uninterrupted investment and planning.
Retirement Security: Builds a substantial retirement corpus over time, providing financial stability and security during retirement years, ensuring a comfortable post-work life.
Financial Literacy: Educates children about responsible financial management, investment strategies, and the importance of saving, empowering them to make informed decisions.
Family Financial Stability: Provides a systematic approach for families to secure their children’s financial futures, contributing to overall financial stability, peace of mind, and reduced financial stress.
Lifetime Financial Planning: Permits continued NPS account management throughout the account holder’s life, ensuring sustained financial planning, security, and adaptability to changing life circumstances.

Challenges

While NPS Vatsalya offers numerous benefits, several challenges need to be addressed to maximize its impact. Key obstacles include:

Lack of Awareness: Many informal sector workers are unaware of the scheme or find the enrollment and contribution process complex, highlighting the need for simplified procedures, enhanced outreach, and local language resources to boost participation.
Unclear Future of Sustainability of Government Co-contributions: Ensuring the long-term sustainability of government contributions is crucial to maintaining the scheme’s viability and attracting participants.
Vulnerable to Market Risks: While market-linked returns offer higher growth potential, they also pose volatility risks. Protecting the pensions of low-income individuals, who are disproportionately vulnerable to market fluctuations, is vital to the scheme’s success.
Inadequate for Short-Term Financial Objectives: What individuals truly need is a straightforward way to channel their savings into reliable investment options that can keep pace with the escalating costs of higher education. Even the most financially savvy investors often overlook saving for their child’s retirement, prioritizing more pressing goals. Thus, while the NPS Vatsalya Scheme aims to secure a child’s retirement, it may not resonate with the more immediate aspirations that most parents have for their children, such as funding their education.
Lacks Tax Efficiency: NPS has limitations compared to other investment options, especially for retirement planning. The mandatory 40% annuity requirement, with low returns and tax inefficiency, reduces its appeal. Other schemes may offer better returns, tax benefits, or flexibility, making them more suitable for retirement savings.

Recommendations:

The following recommendations address the challenges faced by the NPS Vatsalya scheme, including issues such as lack of awareness among informal workers, vulnerability to market risks, and inadequacy for short-term goals:

Enhanced Outreach Programs: The government should launch targeted awareness campaigns for informal workers through community events, local media, and NGOs, using multilingual resources.
Simplified Enrollment Processes: To simplify the enrollment process, user-friendly online platforms and mobile apps with local language support must be created.
Diversified Funding Sources: The government should explore public-private partnerships and a tiered contribution system to supplement government funding. Additionally, a task force for periodic financial reviews based on feedback should be established.
Risk Mitigation Strategies: The Indian government must develop low-risk investment options and a guaranteed return component. Further, a government-backed safety net to ensure minimum pensions must be implemented.
Introduction of Provisions for Short-Term Goals: The Indian government could provide options for loans for short-term necessities like schooling or for partial withdrawals to make the scheme more flexible for short-term objectives. In addition, it has to provide further safeguards against misuse and supplementary savings products, such as education savings plans, that complement the NPS Vatsalya scheme.
Enhanced Scheme Features: The Indian government should regularly update the scheme with competitive features and flexible options.

The Way Forward

NPS Vatsalya is a groundbreaking initiative that promotes financial inclusion and security for India’s most vulnerable populations. By expanding pension coverage and encouraging savings, it paves the way for a more equitable future.

By addressing the aforementioned challenges, the NPS Vatsalya program is poised to provide government employees with ongoing support and financial security for their children. This may be accomplished by establishing enhanced safeguard measures, introducing provisions for short-term objectives, and improving scheme characteristics as a whole. In summary, the scheme seeks to better serve its beneficiaries and provide them with complete financial stability for the future by bolstering these areas. Thus, with continued efforts to improve awareness and accessibility, the scheme can transform millions of lives, ensuring a dignified life for all.

References

Central Bank of India. NPS Vatsalya Scheme. Central Bank of India. Retrieved September 13, 2024, from https://www.centralbankofindia.co.in/en/NPS-Vatsalya-Scheme
HDFC Bank. What is NPS Vatsalya Scheme? Key features & benefits. HDFC Bank. Retrieved September 13, 2024, from https://www.hdfcbank.com/personal/resources/learning-centre/union-budget/nps-vatsalya-scheme#:~:text=The%20Finance%20Minister%20has%20proposed,account%20or%20non%2DNPS%20plan
PersonalFN. NPS Vatsalya a worthwhile proposition to plan for your child’s future? Know here*. PersonalFN. Retrieved September 13, 2024, from https://www.personalfn.com/dwl/Financial-Planning/is-nps-vatsalya-a-worthwhile-proposition-to-plan-for-your-childs-future-know-here
Srivastava, A., Kumar, R., & Singh, N. (2024, September 13). What is NPS Vatsalya? How parents and guardians can invest for minors in this scheme*. The Economic Times. Retrieved from https://economictimes.indiatimes.com/markets/expert-view/what-is-nps-vatsalya-how-parents-and-guardians-can-invest-for-minors-in-this-scheme/articleshow/112125314.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

About Author: This article has been written by Sarah Ansari, a Research Intern at IMPRI. She graduated with a BA (Hons) Economics in 2023.

Acknowledgement: The author would like to thank Arohi Sanyal and Ishita Deb for providing valuable insights and suggestions for the article.