NPS Vatsalya: Can parents withdraw money? Check withdrawal rules and tax benefits

New Delhi: Parents can start the investment journey for their children now instead of waiting for them to turn 18. NPS Vatsalya is one such government-backed scheme that aims to build a corpus for the child until they attain 18 years of age.

This National Pension System product for children is a voluntary savings scheme that allows parents to open a pension account for their children. It helps parents build a corpus for their children until they attain adulthood and can take forward the savings and investment journey on their own.

The scheme was announced on 18 September 2024 and is covered under the National Pension System under Sections 12(1)(a) and 20 of the Pension Fund Regulatory and Development Authority Act, 2013.

After the scheme is rolled out, the minor is the subscriber and the sole beneficiary of the scheme, with a Permanent Retirement Account Number issued. The parents or legal guardians, however, operate the account until the subscriber turns 18 and will also be the nominees.

Contributions can be made any number of times in a financial year. Apart from parents, relatives and friends can also make contributions through registered PoPs or online through mobile apps, UPI apps or the eNPS portal.

The returns are linked to the market, and the interest rate is governed by the performance of the particular Pension Fund.

While the intent might be to build a dedicated fund for the child, an emergency may arise at any time, requiring the parents or guardian to access the fund. The funds can be withdrawn, but there are certain limitations which, along with the tax implications, make the process more complex.

Withdrawal

The funds can be withdrawn for specific purposes, including education, medical treatment and disability of over 75%. To be eligible for withdrawal, it is important to have been enrolled in the scheme for at least three years. 25% of the contributions, excluding the returns generated, can be withdrawn at a time.

Until the subscriber turns 18, a maximum of two such partial withdrawals can be made. Further, after attaining the age of 18, two additional withdrawals can be made until the age of 21. It is mandatory to complete the KYC once the beneficiary turns 18, or the withdrawal will not be allowed.

The beneficiary, after turning 18, may also choose to shift the entire corpus to the All Citizen Model or any other applicable model of NPS. If the entire corpus is Rs 8 lakh or more, 20% of the amount must be used to buy an annuity, and the remaining 80% can be taken as a lump sum. However, if the total amount is below Rs 8 lakh, the entire corpus can be taken as a lump sum.

Tax

It is important to understand the tax benefits available on contributions and withdrawals to avoid any confusion, as one must not assume that the deductions available while contributing the sum determine the tax treatment of the fund at the time of withdrawal.

Under the old tax regime, a deduction of up to Rs 50,000 is available on eligible contributions under Section 124(4) of the Income-tax Act, 2025 (Section 80CCD(1B) of the Income-tax Act, 1961). No such deduction is available under the new tax regime.

Partial withdrawals of more than 25% of the contributions made under the new and old tax regimes would be taxable under the applicable provisions of the Income-tax Act, 2025.

When one exits the scheme and closes the account, a lump-sum withdrawal of up to 60% of the corpus is tax-exempt. Also, the amount used for the purchase of an annuity is exempt at the time of purchase under Section 124(9). The same exemptions apply under both the old and new tax regimes.

However, in the event of the minor's death, the amount received by the parent, legal guardian or nominee from the NPS Vatsalya account, as applicable, is not treated as their taxable income.