The Finance Bill, 2025, proposes several key changes in the Income Tax Act, 1961, to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing1 various provisions. Here are some of the key changes:
Deduction under section 80CCD for contributions made to NPS Vatsalya
NPS Vatsalya Scheme: This scheme allows parents/guardians to open a National Pension Scheme (NPS) account for their minor children.
Tax benefits: The Bill proposes to extend the tax benefits available under Section 80CCD to contributions made to NPS Vatsalya accounts.
Deduction: A deduction of up to Rs. 50,000 will be allowed from the parent/guardian’s total income for contributions to these accounts.
Taxation on withdrawal: The amount withdrawn from the NPS Vatsalya account will be taxed when the minor reaches the age of majority.
Death of minor: If the account is closed due to the death of the minor, the amount received will not be considered income for the parent/guardian.
Partial withdrawal: Partial withdrawals for contingencies like education, medical treatment, or disability of the minor will be exempt up to 25% of the contributions made.
Effective date: These amendments will take effect from April 1, 2026.
II. 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under sub-section (1B) of section 80CCD or any amount accrued thereon, will be charged to tax when such amount is withdrawn, in the case where deposit was made in the account of a minor; and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]