Is NPS Vatsalya a good fit for your child’s education fund?

Last year, the Pension Fund Regulatory and Development Authority (PFRDA) announced the Multiple Scheme Framework for subscribers of the National Pension System (NPS) to allow 100% equity exposure as well as to liberalise exit and annuitisation norms.

Now, the regulator has turned its attention to NPS Vatsalya. Introduced in 2024, the stated objective of this scheme is to help parents create a long-term financial savings kitty for children.

Liberal exit norms

On 13 January, the PFRDA granted additional leeway to subscribers for making partial withdrawals and exits. The key change lies in exit norms. Earlier, a child beneficiary, upon turning 18, could either switch to NPS Tier-I All Citizen Model (non-government subscribers), or exit with 20% of the corpus as a lump sum with the rest being converted into pension or annuities.


“With the new rules permitting up to 80% lump-sum withdrawal, it will become attractive as an instrument for creating a higher education corpus. The balance 20% annuity can be postponed and bought later at an appropriate age,” says Sumit Shukla, MD and CEO, Axis Pension Fund.

As in the case of non-government NPS plans, clarity is needed on whether the additional 20% lump sum will be taxed; at present, a 60% lump-sum withdrawal is tax-free.

The new rules state that beneficiaries can, till the age of 21, exit with up to 80% as a lump sum, and only 20% must be used to buy annuities.

“This is a new and more flexible exit option. Now, the scheme provides the liquidity needed for global higher education, while the mandatory 20% partial withdrawal provision ensures the child’s long-term financial security. It supports education goals without compromising future retirement needs,” explains Vishwajeet Goel, Head of Pensionbazaar.com.

“The annuity amount, in the form of regular income, will be available to the beneficiary when they retire,” according to Kunal Kabra, Founder, Kustodian.Life.

If the corpus size is less than Rs.8 lakh, the entire amount can be withdrawn as a lump sum. From Rs.1,000 per year, the minimum initial and annual contribution has come down to Rs.250. Not only parents, but even relatives and friends can contribute to NPS Vatsalya.

Relaxed partial withdrawal rules

Earlier, three partial withdrawals, up to 25% of the subscriber’s own contribution, were permitted after three years of opening the account up to the age of 18.

Now, two such partial withdrawals (with a cap of 25%) will be allowed up to the age of 18, and another two up to the age of 21. Parents can make withdrawals only for three specific needs: education, medical treatment, and certain disabilities.

NPS Vatsalya: Withdrawal curbs limit utility as education savings avenue

Earlier

Exit options

• After reaching age 18...
• Shift to NPS Tier-I OR
• Exit with up to 20% as lump sum, 80% annuitised
• Full withdrawal if corpus size <Rs.2.5 lakh

Partial withdrawal up to 25% of own contributions
3 years after opening, thrice before 18 years.
Minimum initial, annual investment
Rs.1,000

Now

Exit options

Till the age of 21...

• Continue under Vatsalya OR
• Shift to NPS Tier-I OR
• Exit with up to 80% as lump sum,
• 20% annuitised Full withdrawal if corpus size <Rs.8 lakh

Partial withdrawal up to 25% of own contributions
3 years after opening, allowed twice before age 18, and twice between the ages of 18 and 21.
Minimum initial, annual investment
Rs.250

Eligibility criteria

• Open to all Indian citizens, including NRI/OCI.
• Beneficiaries are minor children, below 18 years of age.
• Account to be operated by the guardian till the child attains majority.
• No maximum cap on investments in a year.

Pros

• Relatives and friends can contribute to child’s savings kitty.
• Low fund management charges and other costs.
• Higher equity exposure can boost long-term corpus.
• Inculcates savings discipline over the long term.

Cons

• Mandatory 20% annuitisation limits scope in times of ever-growing education fund requirements.
• Partial withdrawal allowed 4 times, only from own contributions, diluting utility as primary education funding avenue.
• Part of the funds diverted to children’s retirement/regular income needs when parents ought to be planning their own.
• No clarity yet on taxability of entire lump-sum withdrawal (currently, 60% can be withdrawn taxfree under non-government NPS plans).

Not primary vehicle for education

Despite the introduction of these flexibilities, NPS Vatsalya’s utility as an investment avenue for children’s higher education remains limited, say financial advisers.

To be sure, over long investment horizons, compounding can turn even modest, regular investments into a meaningful corpus. It also inculcates a savings habit for both parents and children. However, parents are bound to prioritise an education fund first. Besides, they cannot lose sight of their own retirement needs, a critical goal that is often compromised in the pursuit of funding their child’s higher education.

According to an HSBC survey of affluent individuals from 2024, 78% of Indian parents either planned to send their children abroad for higher studies or have already done so, even though the cost of education in destinations such as the United Kingdom and the United States can amount to as much as 64% of their retirement savings. As many as 27% of the respondents said they would even consider selling assets to finance their child’s overseas education, as per the report.

Given their predicament, it is highly unlikely that parents will save for their child’s retirement. There could be exceptions, though—if the child has special needs that warrant a steady income. “The 25% (partial withdrawal cap) is too low as a larger kitty is needed for meeting higher education needs. This is a product that will be useful for the child’s retirement, but why should that be the parents’ responsibility?” asks Mrin Agarwal, Founder, FinSafe.

The mandatory annuitisation component makes it less suitable as a primary instrument for creating an education fund. “It is not the sole vehicle for funding higher education but a long-term savings account focused on the child’s future, and these changes are in the right direction to make that more effective,” adds Kabra.