NPS Vatsalya Gets Rs 50,000 Tax Break in Budget 2025: A Boon for Your Child's Future

Union Finance Minister of India Nirmala Sitharaman announced a significant tax benefit for parents investing in the National Pension System (NPS) Vatsalya scheme during the Union Budget 2025-26 presentation on February 1st, 2025. Parents can now claim a deduction of up to ₹50,000 on their contributions towards their child's NPS Vatsalya account.

Advertisement

Subscriptions to the National Pension System (NPS) enjoy tax deductions under Section 80CCD of the Income Tax Act. Now, the Finance Minister has extended deductions similar to the recently launched NPS Vatsalya scheme.

What is NPS Vatsalya?

Launched in September 2024, NPS Vatsalya is a government-backed pension scheme designed specifically for minors. It allows parents or guardians to invest in their child's future financial security by doing NPS Vatsalya registration online in their name.

Currently, the scheme allows parents or guardians to contribute a minimum of ₹1,000, with no maximum limit. Since the scheme is designed for long-term wealth building, it leverages the power of compounding, meaning that the longer the investment horizon, the greater the wealth accumulated. Moreover, it builds a pension corpus that can later be converted into an annuity, providing a steady income stream during retirement.

Key Highlights of NPS Vatsalya Tax Benefits

The Finance Minister proposed the following tax incentives for NPS Vatsalya subscriptions:

• Deduction up to ₹50,000 under Section 80CCD(1B): Contributions by parents or guardians to a minor's NPS Vatsalya account will be eligible for a deduction up to ₹ 50,000. This is over and above the ₹1.5 lakh limit under Section 80C.
• Exemption under Section 12(B): NPS Vatsalya provides flexibility, allowing parents to withdraw up to 25% of their contributions to cover their child’s education, medical needs, or any unforeseen emergencies.
• Exemption under Section 80CCD(3): Any accumulated pension wealth inherited from a deceased NPS subscriber will not be taxed. This applies to NPS Vatsalya beneficiaries as well.

These deductions will provide a much-needed stimulus for greater involvement in retirement savings programs for minors. However, they will not apply to individuals who have opted for the New Tax Regime.

Why This Tax Benefit is Important?

Typically, financial planning for children focuses on education savings, but retirement planning is often overlooked. The government’s decision to extend tax benefits to NPS Vatsalya is expected to encourage families to start investing in retirement savings for their children early.

Encouraging Long-Term Savings

• Usually, retirement planning starts late in life, but NPS Vatsalya helps inculcate the habit of early saving.
• With structured contributions over time, the scheme ensures financial stability in the long run.

Providing Financial Security to Dependents

• Many parents worry about securing their child's future.
• With tax-free inheritance under Section 80CCD(3), dependents receive the accumulated amount without any tax burden.

Tax Optimisation for Families

• Generally, taxpayers look for ways to maximise their deductions.
• With this additional ₹50,000 exemption, families can effectively lower their taxable income.

More Participation in NPS Vatsalya

• The new tax benefits are expected to increase participation in the NPS Vatsalya program.
• Generally, tax incentives attract more investors who want to save for their children’s future while reducing their tax liability.

How can Parents Benefit From This?

NPS Vatsalya yojana offers several advantages that make it an attractive investment option for parents looking to secure their child's future. The recently announced tax incentives further increase the appeal of this retirement savings scheme.

One key benefit is higher tax savings for contributors. Individuals can generally claim a deduction of up to ₹1.5 lakh under Section 80C. With NPS Vatsalya pension scheme subscriptions eligible for an additional deduction of ₹50,000 under Section 80CCD(1B), parents can reduce their taxable income substantially.

Another major incentive is building a strong financial base for the child at an early stage. Regular contributions made now will accumulate and compound over the long term. By the time the child reaches retirement age, these savings can potentially ensure financial independence.

NPS Vatsalya scheme also offers flexibility in withdrawals. Parents can withdraw up to 25% of their contributions to meet essential expenses related to the child's education, medical treatment, or other emergencies, making it a more practical financial planning tool.

Moreover, the inheritance tax exemption provides further security for future generations. Any accumulated pension wealth transferred to the nominee remains completely tax-free, ensuring dependents have a strong financial cushion to fall back on if necessary.

Conclusion

The income tax Budget 2025 announcement regarding extending NPS tax benefits to Vatsalya accounts is a welcome move. Allowing deductions up to ₹50,000 will motivate more parents to invest in securing their child's retirement needs. This is essential to promote financial planning consciousness early in life. Overall, the tax incentives announced by the Finance Minister will boost the NPS Vatsalya scheme and long-term savings mobilisation.

Disclaimer: This article is part of sponsored content programme. The Tribune is not responsible for the content including the data in the text and has no role in its selection.