2024-09-29 23:26:33
New Delhi: NPS Vatsalya Yojana was launched last week. Under this scheme, parents can open an NPS account in the name of their children. Through this, savings can be made for their retirement. But, is this scheme really beneficial? To know the answer to this question, Economic Times (ET) Wealth spoke to some experts. Come, let us know what the experts’ opinion is.
Should parents invest in NPS Vatsalya?
Experts have mixed reactions on this question. Some experts believe that this scheme is a good option for long-term savings for children. At the same time, some do not consider it necessary.
Preeti Chandrasekhar, India business leader (health and wealth) at Mercer, says, “Absolutely, the scheme encourages savings for children. If you want to save money for your child’s retirement and want to make him understand the power of compounding, then NPS Vatsalya is a good option.
Rajesh Khandagle, NPS Head, Kfin Technologies, also shares this opinion. He says, ‘Yes, any parent who wants to inculcate the habit of investing in their child from the very beginning should consider NPS Vatsalya. Give them the gift of starting investing and let them watch their money grow.
However, Vidya Bala, co-founder of PrimeInvestor.in, has a different opinion. He believes, ‘If parents are looking for goal-based investments for their children, they can skip NPS Vatsalya. For a parent, saving for the child’s education or other goals is more important than saving for the child’s retirement.
Raj Khosla, MD, MyMoneyMantra.com, also does not consider NPS Vatsalya to be the best way to save for children. “Given the restrictions on withdrawals, this is not the best way for children to save,” he says. The child needs money for education at the age of 18 and for marriage at the age of 25. NPS Vatsalya will not be useful for these goals.
Are there any better options for saving for a child?
Experts’ opinions are divided on this question also. Some experts believe that there are better options than NPS Vatsalya. While some consider it a good option.
Preeti Chandrashekhar believes that to invest in mutual funds one should have some understanding of the market. NPS Vatsalya has auto mode options, which decide the asset mix based on your age. For those who do not understand the market, this can be a good way to start investing.
Rajesh Khandagle also considers NPS Vatsalya as a good option. “Other products may have given better returns, but NPS has been consistent over the long term,” he says. Pension plans also provide an inherent discipline. Once invested, you cannot withdraw the money until you retire. You stay invested for the long term.’
However, Vidya Bala believes, ‘Products like Sukanya Samriddhi Yojana or PPF meet the goals to some extent, but with a lower risk-return profile. Locking money in annuity or converting to NPS misses many stages of a child’s development and growth in life.’
Raj Khosla says, ‘Not all investors investing in mutual funds have earned high returns because investors exit early. NPS Vatsalya is a very long term product. If investments are allowed to compound for 40-50 years, even a small amount can turn into a huge sum at the age of 60.’
Is it right to burden the child with long term products?
Experts have different opinions on this question also. Some experts believe this is appropriate. Some do not consider it correct. Preeti Chandrashekhar says, ‘Why not? A person who is 25 years old today cannot imagine himself at the age of 60. At the age of 60, we are expected to live for another 20 years. No one knows how longevity will increase in the future. This may not be a significant part of your total savings, but some of it can be put into the plan.
Rajesh Khandagle believes, ‘It is possible. It depends on the individual what choice he makes. NPS is a strictly regulated investment option. There is a lot of flexibility in this. There is no penalty in NPS if you miss contributions for a year for any reason. It is also a very low cost product. This is a clear advantage.’
However, Vidya Bala does not agree with this. He says, ‘No, youth need more flexible products that allow them to access their corpus when they need money. Simple products like PPF and more vibrant products like mutual funds allow small savings with the flexibility of withdrawal when needed.’
Raj Khosla says, ‘Yes, the scheme gives reluctant investors an exit option at the age of 18 years. If the corpus is less than Rs 2.5 lakh then the entire amount can be withdrawn. If it is more than Rs 2.5 lakh then 20% can be withdrawn and the remaining 80% can be invested in annuity.
How can the scheme be made more attractive?
Experts have given some suggestions in answer to this question. Preeti Chandrasekhar says more flexibility. When it was started, NPS was very different from what it is today. Over the years pension plans have become more flexible and investor friendly. We will have to wait. It remains to be seen how NPS Vatsalya progresses.
Rajesh Khandagle suggests, ‘Tax benefits. Income tax benefits can be extended on contributions to NPS Vatsalya. The child will not get any tax benefits, but the guardian will be eligible. However, there is no clarity on this issue at this time.
Vidya Bala believes, ‘Allow evacuation. To make NPS Vatsalya valuable for savers, withdrawals up to 70-80% should be allowed at the age of 18 to meet the medium-term needs of the child. The rest can be used to build a retirement kitty through regular NPS.’
Raj Khosla suggests, ‘Complete withdrawal at the age of 18. Why is NPS Vatsalya not treated the same as NPS Tier II, from which money can be withdrawn when the child turns 18 or for specific purposes like education, marriage or medical emergency?’
Some things about NPS Vatsalya Scheme
Who is eligible?
All citizens under the age of 18 years.
Who can open an account?
A parent or guardian can open an account in the name of a minor.
minimum contribution
Rs 1,000 per year. There is no maximum limit.
Tenure
When the child turns 18 it can be converted to a regular NPS Tier I account.
withdrawal
If the corpus is less than Rs 2.5 lakh at the age of 18 years then it can be withdrawn. Otherwise only 20% can be withdrawn, 80% is put into the annuity.
taxation
There is no tax impact when the account is converted to regular NPS at the age of 18 years. Same tax rules as NPS Tier I.