Should You Invest In NPS Vatsalya For Your Child? Advisors Are Not So Sure

The National Pension Scheme Vatsalya, which was launched on Thursday, aims to allow Indians to invest in the government's pension scheme on behalf of their children.

The National Pension Scheme has gained momentum over the past decade as a viable retirement option for Indians. The new scheme was launched to widen the ambit to also include minors.

But should you invest in Vatsalya? The answer could well depend on what you think your child would need the funds for. The rules that govern this investment will determine whether it is appropriate to meet your goals.

One of the most popular reasons for investing on behalf of a child is to fund their higher education. The NPS Vatsalya may not be the best option in this situation, according to Vinit Iyer, principal officer and managing director, Prudeno Wealth.

"This shouldn't be an option because of the lack of liquidity. The options for transfer of corpus are too limiting, so this doesn't fulfil the requirements for education," said Iyer.

The NPS Vatsalya allows for complete withdrawal after the age of 18 years, but has certain restrictions based on the size of the corpus. A full withdrawal is only allowed if the corpus is equal to or less than Rs 2.5 lakh. If it is more than this amount, only 20% is withdrawable. The remainder must be invested in an annuity.

"The cash flows from annuity will also be limited and this will pose a challenge," Iyer said.

Mrin Agarwal, founder of Finsafe, echoed this view. "Most people would need the money at the time of higher education of the child rather than over the long term, and so, from that perspective an investment into mutual funds would be preferable," he said.

This may even be the case if the purpose of investment is to provide a nest egg at the time of the child's retirement. If not withdrawn at 18, the NPS Vatsalya transitions seamlessly into an NPS tier-1 account. This, then, remains locked till the age of 60.

"The products that could emerge in the future will likely be very different. The NPS, unless it is updated, may not be relevant in the future," Iyer said. The assumption being made in this case is that the child would want to retire only at the age of 60, but this may well be incorrect, he said.

Issues could also emerge if the child decides to migrate to another country. The maintenance of the NPS account would be a challenge and the proceeds could also be taxable in the resident country, Iyer said.