Tax Treatment of NPS Vatsalya

The NPS Vatsalya Scheme, introduced in September 2024, is a child-focused pension initiative under the National Pension System (NPS) in India. It allows parents or guardians to open and manage NPS accounts for their minor children (below 18 years), aiming to instill early financial discipline and secure long-term retirement benefits for the child.

 

💸 Tax Benefits of NPS Vatsalya

✅ 1. Deduction under Section 80CCD(1B)

• Contributions made to the child’s NPS Vatsalya account are eligible for a tax deduction of up to ₹50,000 per financial year.

• This is in addition to the ₹1.5 lakh deduction available under Section 80C.

• Important: This deduction is only available under the old tax regime.

🔁 2. Shared Deduction Limit

• If a parent contributes to both their own NPS account and the child’s NPS Vatsalya account, the combined deduction limit under Section 80CCD(1B) remains ₹50,000.

• This means the benefit cannot be claimed twice—it’s a cumulative limit.

📤 3. Tax Treatment on Withdrawal and Maturity

• Upon the child’s retirement age (60 years), the account matures.

• At that point:

  • 60% of the corpus can be withdrawn tax-free.

  • The remaining 40% must be used to purchase an annuity, which will provide pension income taxable in the hands of the child as per their slab rate.

💊 4. Partial Withdrawals – Tax-Free in Specific Cases

• Partial withdrawals (up to 25% of the contributions) are allowed for reasons such as:

  • Higher education

  • Treatment of critical illness

  • Disability

• These withdrawals are not taxed, provided they meet the specified conditions.

👨‍👩‍👧 Who Can Open NPS Vatsalya?

• Indian citizens who are parents or legal guardians of a minor child can open the account.

• Once the child turns 18, the account ownership shifts to them, and they can continue contributions.

💼 Investment and Contribution Rules

• Minimum Contribution: ₹1,000 per year

• No maximum limit, but tax benefit caps apply

• Offers flexible investment options—default, auto, or active choice

📌 Final Thoughts: Is NPS Vatsalya Right for You?

For long-term planners and parents looking to combine future security with present tax savings, NPS Vatsalya is a powerful tool. While the long lock-in period might seem like a drawback, it’s precisely what makes the scheme ideal for retirement-focused compounding.

Moreover, in a tax environment where benefits under the old regime are increasingly precious, this is one deduction you shouldn’t miss—especially if you're already inclined toward disciplined investing.

💬 Have questions or want to learn how to integrate NPS Vatsalya into your financial planning? Leave a comment or connect with us for a personalized consultation. At Tax Manthan, we’re committed to making tax wisdom your financial superpower.

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