In a significant move aimed at boosting long-term savings, Finance Minister Nirmala Sitharaman, during her Union Budget speech on February 1, 2025, proposed an extension of tax benefits under Section 80CCD (1B) to contributions made towards the National Pension System (NPS) Vatsalya scheme. This change, which comes into effect on April 1, 2025, is expected to encourage parents to start saving for their children’s retirement from an early age.
Understanding the New Tax Benefits
The proposal extends the tax benefits available under sub-section (1B) of Section 80CCD of the Income-tax Act, 1961, to NPS Vatsalya accounts. This effectively means that parents contributing to this pension scheme for their minor children will now be able to claim additional tax deductions up to ₹50,000 over and above the existing ₹1.5 lakh limit under Section 80C.
Finance Minister Sitharaman stated, “It is proposed to extend the tax benefits available to the National Pension Scheme under sub-section (1B) of Section 80CCD of the Income-tax Act, 1961, to the contributions made to the NPS Vatsalya accounts.”
This announcement marks a significant step toward fostering a culture of long-term savings and financial security for future generations.
What is Section 80CCD (1B)?
Section 80CCD (1B) is a provision in the Income Tax Act that allows individuals to claim an additional tax deduction of ₹50,000 for contributions made to the NPS. This is separate from the ₹1.5 lakh deduction available under Section 80C. However, these benefits are applicable only under the old tax regime. The new tax regime, introduced in recent years, limits tax benefits primarily to employer contributions under Section 80CCD (2).
CA Ashish Niraj, Partner at ASN & Company, Chartered Accountants, explains, “Budget 2025 has extended Section 80CCD (1B) benefits to NPS Vatsalya, covering up to two children. The scheme also enjoys tax exemptions under Section 12(B) and 80CCD (3), while maintaining the combined ₹50,000 deduction limit for self and Vatsalya accounts. With subscriber numbers below one lakh in its initial phase, these tax advantages are expected to boost the scheme’s adoption.”
What is NPS Vatsalya?
Launched in September 2024, NPS Vatsalya is a dedicated pension scheme for minors regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It allows parents to open retirement accounts for their children under 18 years of age. Upon reaching adulthood, these accounts automatically convert into Tier-I NPS accounts, ensuring continuity in retirement savings.
The scheme is designed to provide minors with a long-term financial cushion and a structured retirement savings plan. This initiative aligns with the government’s broader strategy to instill financial discipline and promote investment habits from a young age.
Why is This Change Important?
Financial planning experts see this development as a major incentive for parents to begin saving for their children’s retirement early.
Abhishek Kumar, a SEBI-registered investment advisor, notes, “The changes are intended to make the scheme more lucrative to parents so that they start saving money for their children. From April 1, 2025, contributions to NPS Vatsalya accounts will enjoy the same benefits as regular NPS accounts, subject to overall limits under the old tax regime. This means these accounts will also receive tax exemptions of up to ₹50,000 annually under Section 80CCD (1B), over and above the ₹1.5 lakh limit under Section 80C.”
The decision to extend these benefits is expected to provide a much-needed push to the adoption of NPS Vatsalya, which has so far seen limited participation.
How Does This Benefit Parents and Children?
- Early Retirement Savings: With the rising cost of living and increasing life expectancy, starting retirement savings early can be highly beneficial. A minor’s NPS Vatsalya account, with long-term compounding, can result in a substantial corpus by the time they retire.
- Tax Efficiency for Parents: Parents can claim additional tax deductions on contributions to their child’s NPS Vatsalya account, reducing their taxable income significantly.
- Seamless Transition to Adulthood: Since NPS Vatsalya accounts convert into regular Tier-I NPS accounts upon reaching adulthood, there is no disruption in the savings process.
- Encouraging Financial Discipline: By making retirement savings an integral part of financial planning from an early age, children develop a sense of financial responsibility and long-term planning.
Challenges and Considerations
While the tax benefits associated with NPS Vatsalya make it an attractive option, there are some challenges that need to be considered:
- Limited Appeal Under the New Tax Regime: With the government pushing for a shift towards the new tax regime, which does not provide benefits under Section 80CCD (1B), the long-term appeal of this scheme may be limited.
- Awareness and Adoption: As with many financial instruments, awareness about NPS Vatsalya remains low. More outreach and financial literacy initiatives will be needed to ensure widespread adoption.
- Lock-in Period and Liquidity Constraints: The NPS has a strict lock-in period, with funds primarily meant for retirement. Parents looking for flexible investment options may find other savings instruments more suitable.
Looking Ahead
The extension of tax benefits to NPS Vatsalya accounts represents a step forward in encouraging long-term financial planning for children. By providing tax incentives, the government aims to instill a culture of saving and investment from an early age. However, its success will depend on factors such as awareness, ease of access, and continued policy support.
For parents seeking a structured and tax-efficient way to secure their children’s financial future, NPS Vatsalya is an option worth considering. With the new tax benefits set to take effect from April 1, 2025, it remains to be seen how the scheme evolves and gains traction in the coming years.
