For parents wanting to invest in NPS Vatsalya, PPF, and SSY, it is important to look at the limitations and benefits of all these schemes with a bit of scrutiny since all have different goals that serve different financial needs.
When planning for your child’s future, financial security becomes a crucial concern. From their upbringing, primary to higher education, and marriage - every stage of life requires financial planning and savings that will come in handy for the long term. But if you could start planning for their ‘retirement’ - say in less than a year they are born, would you go for it?
The government recently launched ‘NPS Vatsalya’ - a scheme that would let parents build a retirement corpus for their children. But before this, there are other government-saving schemes, such as the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) that allow you to start saving for your child’s future, particularly for the other, more nearer, stages and needs of life.
But how do these schemes compare to NPS Vatsalya and what are the latter’s limitations? Let’s find out:
NPS Vatsalya is an extension of the National Pension Scheme (NSP), specifically designed for children. The scheme allows parents to contribute towards their children’s future retirement with a focus on building a long-term corpus.
This is what the scheme offers:
Investment Type: NPS Vatsalya, just like NPS, is a market-linked scheme with options across equities, corporate bonds, and government securities.
Returns: Since this pension scheme is market-linked, the returns would vary based on market performance. The scheme aims to provide competitive returns. According to an Economics Times report, the equity component of the NPS scheme has given a CAGR of 14.2 per cent return since its inception in 2004. Moreover, the NPS scheme for central government employees, which is a mix of both debt and equity, has given a CAGR of 9.6 per cent return since its inception.
Tax Benefits: Currently, there is no clear guidance on the tax benefits specific to NPS Vatsalya.
Contribution: Parents or guardians can contribute a minimum of Rs 1,000 annually, without any maximum investment limit.
Withdrawal and Exit Rules: The scheme provides for partial withdrawal before the child turns 18 years old. The parents or guardians can only withdraw after 3 years of joining NPS.
The scheme allows partial withdrawal of up to 25 per cent of your own contribution - and not the entire account balance that includes returns. Also, the withdrawal option is available only 3 times till the child turns 18. The withdrawal can be made for the purposes of education, disability of more than 75 per cent, treatment of specified illnesses, etc., as specified by the PFRDA.
After the child reaches the age of majority (18 years), the NPS Vatsalya Scheme can be converted into a regular NPS account. Hereon, it can be managed independently by the child.
The child can also choose to exit from their NPS account turning major. They have the choice of withdrawing up to 20 per cent as a lumpsum while 80 per cent of the accumulated corpus is to be re-invested into an annuity plan.
PPF is a popular, safe, and long-term savings scheme for building wealth with assured returns. While not specifically designed for children, it is frequently used by parents to save for their child’s future due to its safe and predictable nature.
Investment Type: This is a fixed-income instrument backed by the government.
Returns: PPF offers a 7.1 per cent interest rate per annum which is compounded annually. It offers guaranteed, risk-free returns as well as complete capital protection. The element of risk involved in holding a PPF account is minimal.
Tax Benefits: Contributions up to Rs 1.5 lakh per annum are tax-deductible under Section 80C of the Income Tax Act, 1961. Additionally, the PPF interest and maturity amount are also tax-free.
Contribution Limits: PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Investments can be made in a lumpsum or a maximum of 12 installments.
Lock-in Period & Withdrawals: There is a lock-in period for PPF accounts for minors of 15 years, with the option to extend in blocks of 5 years. Partial withdrawals are allowed after 7 years.
SSY is a government-backed savings scheme designed specifically for a girl child. The scheme provides high returns with tax benefits, making it an attractive option to save for your daughters’ future.
Investment Type: SSY is a fixed-income instrument specifically designed for the girl child.
Returns: The scheme offers a high interest rate of 8.2 per cent.
Tax Benefits: The scheme provides full tax deduction on principal invested up to Rs 1.5 lakh per year under Section 80C. Additionally, both interest and maturity amounts are tax-free.
Contribution Limits: The minimum deposit required to be made in an SSY account is Rs 250 per financial year. You can make deposits at your convenience up to Rs 1.5 lakh per fiscal year.
Lock-in Period & Withdrawals: SSY has a 21-year maturity period or until the girl gets married marriage after 18 years (whichever is earlier). Moreover, parents or girl’s legal guardians can withdraw 50 per cent of the account balance for the educational expenses of the girl's child.
When choosing between NPS Vatsalya, PPF, and SSY, it is important to look at the limitations and benefits of all these schemes with a bit of scrutiny since all have different goals that serve different financial needs.
For example, NPS Vatsalya is designed with a long-term vision to build a retirement corpus for the child. While retirement planning is important, it is a distant goal, especially when more immediate financial needs, such as education, are pressing concerns for parents during the time of upbringing.
One limitation of NPS Vatsalya that can’t be overlooked is that the funds in this pension scheme are locked until the child turns 60. This makes it impractical if your priority is financing your child's education or other life milestones like marriage or buying a house. Moreover, the returns are market-linked, which some parents may not be comfortable with due to market risks and uncertainty, especially when compared to the assured returns of PPF and SSY.
Another factor majorly highlighted by experts is that NPS Vatsalya being a pension plan, should not take precedence over your child's education or even your own retirement planning.
As for the limitations of PPF and SSY: PPF offers lower returns compared to equity-linked investments like NPS, which could be seen as a disadvantage for those looking to build significant wealth over time. The lock-in period of 15 years for PPF, although shorter than NPS Vatsalya, still limits liquidity. Meanwhile, SSY is specifically for the girl child, so it is not an option for parents with male children. The funds in SSY are locked until the girl turns 21, which may limit flexibility for some other financial needs.
Also, while there is no contribution limit to NPS Vatsalya, parents can't contribute more than Rs 1.5 lakh annually in both PPF and SSY, respectively.
All three schemes serve their individual purpose and should be invested in based on your financial goals for the child. For instance, if the target is to save for your child's education or marriage, PPF and SSY offer a more practical approach. They provide assured returns, are tax-efficient, and have relatively shorter lock-in periods. For parents of a girl child, SSY stands out due to its higher interest rate and targeted focus on education and marriage.
If the focus is long-term wealth creation and you are comfortable with market risks, NPS Vatsalya could be a good supplementary option. However, parents should prioritise their investments keeping immediate financial goals in mind. While NPS Vatsalya can be seen as a complement to your child's overall financial portfolio, it should not replace essential savings for education or your own retirement.