Budget 2025: Proposed Changes in Deductions under Section 80CCD for contributions made to NPS Vatsalya
NPS Vatsalya Scheme was introduced on September 18, 2024. This scheme is a savings-cum-pension plan designed for minors. It permits parents or guardians to open and run the National Pension Scheme on behalf of their ward. The scheme comes under the purview of the guardianship of parents until the minor attains the age of 18 years. At this point, the account is transferred to the name of the child with the corpus that has been accrued. Later on, the account comes under the NPS-Tier 1 Account with either the All-Citizen Model or another non-NPS scheme account.
The government has proposed to extend the tax benefits available to the National Pension Scheme (NPS) under Section 80CCD of the Act to the contributions made to the NPS Vatsalya accounts, as follows:
1. Tax Deduction on Contributions
Contributions made by a parent or guardian to a minor’s NPS account will be eligible for a deduction from the parent’s or guardian’s total income, up to a maximum of Rs.50,000 per year, under Section 80CCD(1B).
2. Tax on Withdrawals
If any money, including earnings, is taken out of the account, it will be taxed at the time of withdrawal as long as the account is still in the minor’s name.
3. Deceased Minor
If the account is closed for any reason including the death of the minor, then the accruals from it will not be considered income of the guardian or parent. The plan allows partial withdrawal of the monies from the minor’s account upon specific considerations like education or treatment of specifically declared illnesses/disabilities that will afflict more than 75% of the minor.
There shall be a new clause, 12(12BA), inserted in Section 10 of the Income Tax Act. Withdrawals under such pension fund shall be completely exempted from tax provided they did not exceed 25% of contributions made by a minor. This exemption will only come into force under conditions specified under the Pension Fund Regulatory and Development Authority Act, 2013, and associated regulations. These changes will start on April 1, 2026, and will apply from the assessment year 2026-27 onwards. The scheme is made to offer financial security and long-term savings for minors while giving parents and guardians good tax benefits for contributing to their child’s future.
