This article describes the tax benefits announced in Budget 2025 for the NPS Vatsalya Scheme to understand if these benefits make NPS Vatsalya a good scheme for children’s future.

This article is a part of our detailed article series on Union Budget 2025. Ensure you have read the other parts here: Show/Hide

📚 Topics covered:

• What did Union Budget 2025 say about NPS Vatsalya Scheme?
• Is NPS Vatsalya Scheme a good scheme at all for your children?
  • Does your child really need a pension plan?
  • Is the NPS Vatsalya Scheme the only way for your child to get a pension after retirement?
  • As a parent do you really need the NPS Vatsalya Scheme as an investment product today?
• Does the new tax deduction make NPS Vatsalya Scheme a good investment option for children?
• What are the alternatives to investing in NPS Vatsalya Scheme?
  • Step 1: Identify your child’s goals
  • Step 2: Insure yourself first
  • Step 3: Make an investment plan to cover your child
  • Step 4: Review the plan once a year

What did Union Budget 2025 say about NPS Vatsalya Scheme?

Union Budget 2025 allowed ₹50,000/year tax deduction on contributions made to the NPS Vatsalya Scheme under the following rules:

• applicable only to the Old Tax Regime
• shares the ₹50,000/year limit under Section 80CCD(1B) for NPS Self Contribution

This article is a part of our detailed article series on the NPS Vatsalya scheme. Ensure you have read the other parts here: Show/Hide

Is NPS Vatsalya Scheme a good scheme at all for your children?

Before coming to the tax-deduction introduced in Union Budget 2025 let us first recap the features of the NPS Vatsalya Scheme:

• this is an NPS account for children and parents will contribute to it before the child turns 18
• once the child turns 18, it becomes their normal NPS account
• NPS Vatsalya Scheme account can be opened with ₹1,000 and subsequent contributions have to be at least ₹1,000/year. There is no maximum cap on contributions
• up to 25% of the invested amount (not the corpus value) can be withdrawn three years after opening the account for education, illness and disability for up to three times

We still fail to see what is the benefit of this particular scheme. We have argued against the NPS Vatsalya Scheme using various points:

Does your child really need a pension plan?

A pension plan gives you money every year until life. Pension is a fantastic product that made a lot of sense in the socialist world of the 1960s-2000s India but is meaningless today. Here are the reasons why we say so:

• Pension plans offer fixed payouts which do not grow with inflation
• 40-60 years later, when these pensions start, India will be more developed and just like Western developed nations, pension yields will be much lower than today

Is the NPS Vatsalya Scheme the only way for your child to get a pension after retirement?

No, of course not.

A pension plan, very simply, is a deal between an insurance company and you to get regular sums of money until death in exchange for a large lump-sum payment today.

If you invest in NPS, the government makes it a rule to invest at least 40% of the corpus reached at the age of 60 into a pension plan while the rest is given to you tax-free. You can, of course, invest more than 40% also in the pension plan.

Here are two important points regarding the pension plan:

• you don’t need NPS to buy a pension plan. You can go to any insurance company and buy a pension plan today
• the pension you get depends on the investments you make over time to reach the corpus at the age of 60

As a parent do you really need the NPS Vatsalya Scheme as an investment product today?

We will ask the parent, looking at the NPS Vatsalya Scheme for their child, these three questions:

• Highest priority: Are you investing enough for your own retirement?
• Medium priority: Are you investing enough for your child’s education?
• Lower priority: Are you investing enough for your child’s first house?

If the answer to any of the above questions is a “No” or “Maybe” then NPS Vatsalya Scheme is not for you.

The only use case of NPS Vatsalya Scheme that we can reasonably justify is generational wealth transfer from grandparents to grandchildren cognisant of the lock-in until the child turns 60: Can NPS Vatsalya be used to create wealth across generations?

Does the new tax deduction make NPS Vatsalya Scheme a good investment option for children?

The tax deduction is ₹50,000/year. That too it is shared with self NPS contributions in the old tax regime. It is extremely difficult, after the new tax regime changes announced in Union Budget 2025 to stay in the old tax regime: Union Budget 2025: which is the best tax regime to choose from 1st April 2025?

If you are looking at this contribution solely to save tax under Section 80CCD(1B), then you will be better off for your own retirement via the normal NPS as described here: Which is better: save tax by investing 50,000 in NPS or 35,000 in equity mutual fund?

Also, ₹50,000/year will not create any meaningful corpus after 60 years due to six decades of inflation where the value of money halves every 10 years like this:

If the NPS Vatsalya Scheme corpus reaches ₹11 crores as per this projection shared by Press Information Bureau in 2024 at the time of announcement of NPS Vatsalya Scheme, then we need to adjust that for inflation

A quick mental maths shortcut to calculate this is:

• 7.2% inflation = halving in 10 years
• 60 years = 6 halvings
• 2 ^ 6 = 64
• Value of corpus = 1100 / 64 = 17

We have described the effect in detail here: Will NPS Vatsalya Give Your Child Eleven Crores When They Retire?

All in all, there is no justification to start a NPS Vatsalya Scheme just for the tax deduction. There are many alternatives that will be suitable for most people.

What are the alternatives to investing in NPS Vatsalya Scheme?

We are not saying that NPS Vatsalya Scheme is bad. We are saying that better alternatives with full flexibility and more options exist once you follow the process described below step-by-step:

Step 1: Identify your child’s goals

Your child’s school and other regular expenses will come from monthly income. But you need to plan for bigger expenses in advance:

Which of these are you saving for:

• school admission
• school trip to the US at age 14
• UG-PG college degrees
• house down payment after their first job
• marriage

To understand how to create a child’s education plan:

Book a consultation

Step 2: Insure yourself first

You need to ensure that an untimely death will not prevent your child from going to their future dream college. Term insurance is the right product here. Every earning member of the family must have adequate term insurance.

The whole family, i.e. child and parents should also have sufficient health insurance. This step prevents loss of income or a setback to investment goals due to illness.

Step 3: Make an investment plan to cover your child

Children’s education and other goals do not exist in isolation. They are a part of the comprehensive goal-based planning that parents need to do for their own retirement and everything else. The process is explained best with these examples:

• Case study: how this double income single kid family can perform DIY goal-based investment planning
• Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?
• Case Study: How should couples in their 40s with a new baby plan their financial future?

There are more case studies here: Case Studies.

We have proven that the goal-based investing process works in most market conditions in this article: What is the best way to invest for your child’s college education?.

Step 4: Review the plan once a year

As time passes, things change:

• stock markets go up and down creating or reducing portfolio value
• income increases or decreases (sabbaticals, parents leaving the workforce to look at the kids, illnesses, parents re-entering the workforce)
• the amount of money available increases (windfalls like inheritance or RSUs) or decreases (loss of income, death, medical emergencies)
• college degree plans change as the kid grows up

Therefore the plan created in Step 3 has to be reviewed and rebalanced to check if you are still on track: Are your investments on track for your goals?.