Budget 2025 – NPS Vatsalya Scheme Tax Benefits

NPS Vatsalya scheme was introduced during last year’s Budget. During Budget 2025, Finance Minister gave clarity on NPS Vatsalya Scheme Tax Benefits.

Refer to my earlier posts on Budget 2025 – Budget 2025 – New Income Tax Slab Rates FY 2025-26 and Budget 2025 – 7 Key highlights impacting personal finance

NPS Vatsalya – A Pension Scheme for Minors

NPS Vatsalya is a pension scheme designed for Indian citizens below 18 years old, regulated and managed by the Pension Fund Regulatory and Development Authority (PFRDA). It works similarly to the Public Provident Fund (PPF)—the account is opened in the name of the minor, but the guardian manages it. The minor remains the sole beneficiary, meaning all the funds in the account belong to them.

Refer a detailed post on this “Budget 2024 – NPS Vatsalya Scheme – Should you invest?” and “NPS Vatsalya Scheme – Don’t Invest BLINDLY!!“.

Tax Benefits for NPS Vatsalya (Effective from 1st April 2025)

From 1st April 2025, contributions made to an NPS Vatsalya account will receive the same tax benefits as regular NPS investments under Section 80CCD of the Income Tax Act. Here’s how:

1. Tax Deduction on Contributions (Section 80CCD(1B))

• The parent/guardian contributing to the minor’s NPS Vatsalya account can claim a tax deduction of up to ?50,000 per year.
• This deduction applies to the total amount contributed to both the parent’s own NPS account and the child’s NPS Vatsalya account combined.
• Important: This tax benefit is not available under the new tax regime—it can only be claimed under the old tax regime.

2. Taxation on Withdrawals

• If a parent/guardian has claimed a tax deduction on contributions made to the minor’s NPS Vatsalya account, then:
  • When the money is withdrawn in the future (after the minor turns 18), both the original contribution and the returns earned on it will be taxable in the year of withdrawal.

3. No Tax on Withdrawals in Case of the Minor’s Death

• If the minor passes away, the amount received from closing the NPS Vatsalya account will not be considered taxable income for the parent/guardian.

4. Tax-Free Partial Withdrawals for Specific Needs

• Certain partial withdrawals are not taxable if they are made for specific purposes, such as:
  • Higher education of the minor
  • Medical treatment of serious illnesses
  • Disability-related expenses
• However, the tax-free limit is 25% of the total contributions made by the guardian. Any amount withdrawn beyond this will be taxed.

Summary

• NPS Vatsalya is a pension scheme for minors, managed by parents/guardians.
• From 1st April 2025, contributions will get tax benefits under Section 80CCD(1B), with deductions up to ?50,000 per year.
• Withdrawals will be taxed if tax deductions were claimed earlier.
• If the minor passes away, the withdrawn amount is not taxed.
• Partial withdrawals (up to 25%) for education, medical treatment, or disability are tax-free.