NPS Vatsalya seems like a good investment scheme for parents to teach children about financial discipline, good money habits and saving for a pension from an early age. However, there are certain reasons why the pension scheme, in its current form, may not be suitable to save for children's education and marriage.

Here are the key things you must know before deciding if NPS Vatsalya is suitable for investing for your children.

1. LOWER AMOUNT OF EQUITY: NPS Vatsalya offers investment in auto choice and active choice. Under both investment options, the maximum contribution allowed into equity is 75%. Financial planners argue that the equity allocation is low for an investment option with a lock-in of up to 18 years. Colonel (retd) Sanjeev Govila, CFP, CEO of Hum Fauji Initiatives, says, "Parents usually save for children's education and marriage. This type of investment is long-term, usually 10 years or more. Hence, from a financial planning perspective, investment options with 100% equity are recommended. NPS offering a maximum of 75% equity investment may lead to lower corpus than regular investments made in equity mutual funds."

Concurring with this view, Kavitha Menon, a SEBI registered investment advisor and founder of Probitus Wealth, says, "NPS Vatsalya does not allow parents to put 100% of their contribution in equities. As the money is being invested for the long term, not having 100% equity allocation can be considered one of the drawbacks of the scheme."

2. PENSION FOR KIDS AT 18: NPS Vatsalya allows two options when the child becomes 18 years old: The child can exit the pension scheme or convert the Vatsalya pension account to a regular NPS Tier-I account. If the child decides to exit from NPS Vatsalya, 20% will be paid as a lump sum and 80% will be used to buy an annuity. Further, the pension (annuity) for the kid will start from 18.

However, if the accumulated corpus amount at 18 years old does not exceed Rs 2.5 lakh, the entire corpus will be paid as a lump sum to the kid.

Generally, parents need large amounts at this age to meet the educational expenses of children, especially for higher education. Giving a pension to kids at the age of 18 defeats the purpose of saving for the long term.

3. GOAL RIGIDITY: NPS Vatsalya is a retirement product that parents can use to plan for their children's retirement. According to the pension scheme rules, partial withdrawal is allowed up to three times. Further, the guardian can withdraw up to 25% of the contribution for education, specified illness, and disability.

Partial withdrawal is allowed before the child turns 18. Menon says, "Partial withdrawal is allowed when a child is in school. Generally, parents need money for higher education when the child turns 18. However, NPS Vatsalya does not seem to offer that."

Govila points out that major educational expenses happen in a child's life after 18 years of age. "However, the exit rules of NPS Vatsalya seem to suggest a cut-paste job from the older sibling, the NPS."

4. LOWER CEILING FOR COMPLETE WITHDRAWAL: The regular NPS scheme allows an individual to withdraw the total amount from the NPS account as a lump sum, provided the accumulated money does not exceed Rs 5 lakh at the time of retirement. However, in the case of NPS Vatsalya, the lump-sum withdrawal from the NPS account is allowed if the corpus is less than Rs 2.5 lakh at the time of maturity.

There is a discrepancy in the amount that can be withdrawn as a lump sum from the pension scheme. A child who becomes an adult and has Rs 3 lakh as NPS Vatsalya corpus would get only Rs 60,000 as a lump sum and would need to buy an annuity with Rs 2.4 lakh of the corpus. This amount may not be adequate in many cases. At least a Rs 5 lakh ceiling similar to the regular NPS could have been provided in NPS Vatsalya.

5. EXTENDED LOCK-IN PERIOD: NPS Vatsalya comes with a long lock-in period. Govila says, "Under NPS Vatsalya, there is a lock-in period until the child attains 18 years. If the child opts to shift to the Tier-I NPS account from NPS Vatsalya, the lock-in period of a regular NPS account continues till the age of 60 years. So literally, there is a lifelong lock-in for the child opting for this scheme for pension purposes."

6. LIMITED LIQUIDITY: NPS Vatsalya is a pension scheme for children. As this is a pension scheme, it allows limited partial withdrawals under specified conditions.

According to the scheme, a parent can partially withdraw up to 25% of the contribution (excluding returns) for education, specified illness and disability of more than 75%. The partial withdrawal is allowed after the expiry of the lock-in period of three years from the date of opening of the NPS Vatsalya account. Further, partial withdrawal is allowed only up to three times till the child becomes 18.

However, most big-ticket expenses usually happen after the child crosses the age of 18. Parents may need funds at many stages such as graduation, post-graduation, research, specialization studies, or marriage of the child. Menon says, "NPS Vatsalya, a pension scheme, offers limited liquidity to the parents to meet their child's expenses. The scheme may be unable to help parents when they actually need money to pay for their child's education."

7. LACK OF CLARITY ON TAX: Unlike regular NPS for individuals, which offers EET (Exempt-Exempt-Taxed) taxation, there is a lack of clarity on tax benefits in NPS Vatsalya.

"The government needs to clarify the tax benefits available on the investments made by the parents for their children under NPS Vatsalya," Govila adds.