The NPS Vatsalya Scheme, launched on September 18, 2024, allows parents or guardians to open National Pension Scheme (NPS) accounts for minors, ensuring savings and pension benefits until the child reaches adulthood. The scheme transitions to the NPS Tier-1 account when the minor turns 18. Contributions to NPS Vatsalya accounts qualify for tax benefits under Section 80CCD. A deduction of up to ₹50,000 per year is available under Section 80CCD(1B). Amounts withdrawn from these accounts are taxed if deductions were claimed previously. However, in the event of a minor’s death, the corpus is exempt from tax for the guardian. Partial withdrawals for education, illness, or disability (above 75%) are permitted, with up to 25% of contributions being tax-exempt under specified conditions. These provisions, effective from April 1, 2026, are detailed in the Finance Bill, 2025. Other proposed amendments extend the eligibility dates for tax exemptions and expand definitions to align with regulations for financial services, capital gains, and income tax compliance. These changes ensure broader inclusivity and tax efficiency for the scheme and related investments.
Budget 2025: Deduction under section 80CCD for contributions made to NPS Vatsalya
The NPS Vatsalya Scheme, officially launched on 18 September 2024, enables parents and guardians to start a National Pension Scheme (NPS) account for their children. This savings-cum-pension scheme is designed exclusively for minors and will be operated by the guardian for the exclusive benefit of the minor till they attain majority. When a minor attains 18 years, the account will continue to be operational, transferred to the child’s name with the accumulated corpus and will be shifted into the NPS-Tier 1 Account – All Citizen Model or other non-NPS scheme account.
2. It is 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:
(I) A deduction to be allowed to the parent/guardian’s total income, of the amount paid or deposited in the account of any minor under the NPS to a maximum of Rs 50,000/- overall as mandated under sub-section (1B) of section 80CCD;
(II) The amount on which deduction has been allowed under sub-section (1B) of section 80CCD or any amount accrued thereon, will be charged to tax when such amount is withdrawn, in the case where deposit was made in the account of a minor; and
(III) The amount on which deduction has been allowed and is received on closure of the account due to the death of the minor shall not be deemed to be the income of the parent/guardian;
3. The NPS Vatsalya Scheme also allows for partial withdrawal from the minor’s account to address certain contingency situations like education, treatment of specified illnesses and disability (of more than 75%) of the minor. Accordingly, it is also proposed to insert a clause (12BA) in section 10 of the Act, which provides that any income received on partial withdrawal made out of the minor’s account, shall not be included in the total income of the parent/guardian to the extent it does not exceed 25% of the amount of contributions made by him and in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder.
4. These amendments will take effect from the 1st day of April, 2026, and shall accordingly, apply in relation to the assessment year 2026-27 and subsequent assessment years.
[Clauses 6 & 17]
Extract of Relevant Clauses of Finance Bill, 2025
Clause 6 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
It is proposed to amend clause (aa) of Explanation to clause (4D) of the said section so as to extend the date of commencement of operations specified therein from 31st March, 2025 to 31st March, 2030.
This amendment will take effect from 1st April, 2025.
Clause (4E) of the said section provides that in computing the total income of a previous year of any person, any income accrued or arisen to, or received by a non-resident as a result of transfer of non-deliverable forward contracts or offshore derivative instruments or over the-counter derivatives, or distribution of income on offshore derivative instruments, entered into with an offshore banking unit of an International Financial Services Centre referred to in sub-section (1A) of section 80LA, and fulfilling the conditions as may be provided by rules, shall not be included.
It is proposed to amend the said clause to insert “or any Foreign Portfolio Investor being a unit of an International Financial Services Centre” so as to bring it within the ambit of the said clause.
It is further proposed to insert an Explanation to the said clause to define the expression “Foreign Portfolio Investor” to mean a person registered as per the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
It is also proposed to amend clause (4F) of the said section so as to extend the date of commencement of operations specified therein from 31st March, 2025 to 31st March, 2030.
It is also proposed to amend clause (4H) of the said section so as to extend the date of commencement of operations specified therein from 31st March, 2026 to 31st March, 2030.
It is also proposed to amend the said clause to also provide that income by way of capital gains arising from the transfer of equity shares of domestic company, being a Unit of an International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, engaged primarily in the business of leasing of a ship shall not be included in computing the total income of a non-resident or a Unit of an International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, engaged primarily in the business of leasing of a ship.
It is also proposed to amend the said clause to provide the meaning of “ship” as a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof.
It is also proposed to amend the eighth proviso to clause (10D) so as to provide that the provisions of the fourth, fifth, sixth and seventh provisos shall not apply to any sum received,–
(i) on the death of a person; or
(ii) under a life insurance policy issued by International Financial Services Centre insurance intermediary office, including the sum allocated by way of bonus on such policy.
It is also proposed to insert an Explanation to the eighth proviso to the said clause to provide that “International Financial Services Centre insurance intermediary office” shall have the same meaning as assigned to it in clause (s) of sub-regulation (1) of regulation 3 of the International Financial Services Centres Authority (Insurance Intermediary) Regulations, 2021, made under the International Financial Services Centres Authority Act, 2019.
These amendments will take effect from 1st April, 2025.
It is also proposed to insert a new clause (12BA) in the said section so as to provide that any payment from the National Pension System Trust to an assessee, being the parent or guardian of a minor, under the pension scheme referred to in section 80CCD, on partial withdrawal made out of the account of the minor, as per the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 and the regulations made thereunder, to the extent it does not exceed twenty-five per cent. of the amount of contributions made by such guardian.
Clause (23FE) of the said section, inter alia, provides that income of the nature of dividend, interest, any sum referred to in clause (xii) of sub-section (2) of section 56, or longterm capital gains arising from an investment made in India, shall not be included in computing the total income of a specified person. Sub-clause (i) of the said clause provides that the investment is to be made on or after 1st April, 2020 but on or before 31st March, 2025.
It is proposed to amend the opening portion of the said clause so as to provide that income in the nature of long-term capital gains (whether or not such capital gains are deemed as short-term capital gains under section 50AA), shall not be included in computing the total income of a specified person.
It is further proposed to amend sub-clause (i) of the said clause so as to extend the date of investment from 31st March, 2025 to 31st March, 2030.
These amendments will take effect from 1st April, 2025.
It is also proposed to amend clause (34B) so as to also provide that income by way of dividends from a company being a Unit of any International Financial Services Centre primarily engaged in the business of leasing of a ship, shall not be included in computing the total income of a Unit of any International Financial Services Centre, primarily engaged in the business of leasing of a ship.
It is also proposed to amend the Explanation of the said clause so as to define the expression “aircraft”, “International Financial Services Centre” and “ship”.
These amendments will take effect from 1st April, 2025.
Clause 17 of the Bill seeks to amend section 80CCD of the Income-tax Act relating to deduction of contribution to pension scheme of Central Government.
The said section provides for deduction in respect of contribution to pension scheme of the Central Government by the assessee, being an individual employed by the Central Government on or after the 1st January, 2004 or, being an individual employed by any other employer or any other assessee being an individual has in the previous year paid or deposited any amount in his account under the said pension scheme.
It is proposed to insert a second proviso to sub-section (1B) and to amend sub-sections (3) and (4) of the said section so as to extend the tax benefits available to a pension scheme under section 80CCD, to the contributions made to the National Pension Scheme Vatsalya Accounts, as follows:––
(a) a deduction to be allowed to the parent or guardian’s total annual income, of the amount paid or deposited in the account of any minor under a pension scheme under subsection (1B) of section 80CCD to a maximum of 50,000 rupees;
(b) chargeability of amount on which deduction has been allowed under sub-section (1B) of section 80CCD is also proposed to be provided where such amount or any interest accrued thereon is withdrawn in the case where deposit was made in the account of the minor;
(c) the amount received by the assessee, on the death of the minor resulting in closure of the account in respect of which deduction has been allowed earlier under sub-section (1B) of section 80CCD shall not be deemed to be the income of the parent or guardian.
These amendments will take effect from 1st April, 2026, and will, accordingly, apply in relation to the assessment year 2026-2027 and subsequent assessment years.
Extract of Relevant Amendment Proposed by Finance Bill, 2025
6. Amendment of section 10.
In section 10 of the Income-tax Act
(a) in clause (4D), in the Explanation, in clause (aa), for the figures “2025”, the figures “2030” shall be substituted;
(b) in clause (4E), with effect from the 1st April, 2026,–
(i) in the long line, after the word, figures and letters “section 80LA”, the words “or any Foreign Portfolio Investor being a unit of an International Financial Services Centre” shall be inserted;
(ii) the following Explanation shall be inserted, namely:–
‘Explanation.––For the purposes of this clause, “Foreign Portfolio Investor” means a person registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 made under the Securities and Exchange Board of India Act, 1992;’;
(c) in clause (4F), for the figures “2025”, the figures “2030” shall be substituted;
(d) in clause (4H),––
(i) in the opening portion,––
(A) for the word “aircraft” at both the places where it occurs, the words “aircraft or a ship” shall be substituted;
(B) for the figures “2026”, the figures “2030” shall be substituted;
(ii) for the Explanation, the following Explanation shall be substituted, namely:––
‘Explanation.—For the purposes of this clause,–
(a) “aircraft” means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof;
(b) “ship” means a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof;’;
(e) in clause (10D), for the eighth proviso, the following proviso shall be substituted, namely:––
‘Provided also that the provisions of the fourth, fifth, sixth and seventh provisos shall not apply to any sum received––
(a) on the death of a person; or
(b) under a life insurance policy issued by the International Financial Services Centre insurance intermediary office, including the sum allocated by way of bonus on such policy.
Explanation.––For the purposes of this proviso, “International Financial Services Centre insurance intermediary office” shall have the same meaning as assigned to it in clause (s) of sub-regulation (1) of regulation 3 of the International Financial Services Centres Authority (Insurance Intermediary) Regulations, 2021, made under the International Financial Services Centres Authority Act, 2019;’;
(f) after clause (12B), the following clause shall be inserted with effect from the 1st April, 2026, namely:––
“(12BA) any payment from the National Pension System Trust to an assessee, being the parent or guardian of a minor, under the pension scheme referred to in section 80CCD, on partial withdrawal made out of the account of the minor, as per the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 and the regulations made thereunder, to the extent it does not exceed twenty-five per cent. of the amount of contributions made by him;”;
(g) in clause (23FE),––
(i) in the opening portion, after the words “long-term capital gains”, the brackets, words, figures and letters “(whether or not such capital gains are deemed as short-term capital gains under section 50AA)” shall be inserted;
(ii) in sub-clause (i), for the figures “2025”, the figures “2030” shall be substituted;
(h) in clause (34B),––
(i) for the word “aircraft” at both the places where it occurs, the words “aircraft or a ship” shall be substituted;
(ii) for the Explanation, the following Explanation shall be substituted, namely:––
‘Explanation.—For the purposes of this clause,––
(a) “aircraft” means an aircraft or a helicopter, or an engine of an aircraft or a helicopter, or any part thereof;
(b) “International Financial Services Centre” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;
(c) “ship” means a ship or an ocean vessel, engine of a ship or ocean vessel, or any part thereof;’.
17. Amendment of section 80CCD.
In section 80CCD of the Income-tax Act, with effect from the 1st April, 2026, ––
(a) in sub-section (1B), after the proviso, the following proviso shall be inserted, namely:––
“Provided further that the deduction under this subsection shall also be allowed, where any payment or deposit is made to the account of a minor under the pension scheme referred to in the said sub-section, by the assessee, being the parent or guardian of such minor, subject to the condition that the aggregate amount of deduction under this sub-section shall not exceed fifty thousand rupees.”;
(b) in sub-section (3),––
(i) in the opening portion, for the words “in his account”, the words “or a minor, in his account or the account of a minor, as the case may be,” shall be substituted;
(ii) after the proviso, the following proviso shall be inserted, namely:––
“Provided further that the amount received by a person, being the parent or guardian or nominee of a minor, on account of closure of the pension scheme referred to in sub-section (1B) due to the death of the minor, shall not be deemed to be the income of such person.”;
(c) in sub-section (4), in the opening portion, after the words “Where any amount paid or deposited by then assessee”, the words “in his account or the account of a minor” shall be inserted.
