The number of investors in India is continuously increasing. With the rise of online trading, more retail investors have emerged in India over the years. People are applying for trading accounts, minor Demat accounts, and other brokerage services. Many of us might not know about the Demat account facilities for minors in India. A minor can learn the basics of trading at a young age with a Demat account. Imparting financial knowledge to children at a young age can do wonders. Read on to understand what is a minor Demat account is and how to apply for one in India.
What is a Minor Demat Account?
Let us first discuss the importance of a Demat account in India. A Demat account is mandatory for investors to hold electronic securities. Investors not having Demat accounts cannot store/hold financial securities in electronic format. They must carry physical trade certificates issued for each transaction. Demat accounts helps with online trading, as they store securities in digital format. They follow the dematerialisation process, which is converting physical securities into electronic form. Once securities are digitised or dematerialised, there is no need to carry physical certificates.
A Demat account works together with a trading or brokerage account. Investors purchase securities and invest in funds via a trading account. Every investor will have a unique trading account to buy and sell assets. When you purchase securities through a brokerage account, they are transferred to the linked dematerialisation account.
Demat accounts came into existence in 1996. However, there was no rule to open a Demat account in the name of a minor. It was later reversed in 2003, and minors could open Demat accounts. The rule exists to date, and minors can apply for new dematerialisation accounts. Parents or legal guardians are responsible for managing the Demat account on behalf of the minor. Once the individual turns 18 of age, they can gain full control of the Demat account. It allows parents to open Demat accounts for their children and help them learn the basics of trading and investing. Let us now understand the eligibility for minor Demat accounts in India.
Who Can Open a Minor Demat Account in India – Eligibility
Anyone above 18 years of age can apply for a Demat account in India. Investors can leverage the services offered by stockbrokers and Depository Participants (DPs) to open Demat accounts in India. Once you have a 2-IN-1 Demat and trading account, you are allowed to buy/sell shares and other securities. Minors in India are not allowed to buy or sell shares, as per the Indian Contracts Act (1872). However, the 2013 Companies Act allows any Indian citizen to hold shares in public companies, irrespective of their age.
Due to the 2013 Companies Act, minors are allowed to hold shares in their name. However, they must apply for a minor account with demat to do so. Many minors receive public shares as an inheritance. Some parents transfer shares to their children as a gift. Any Indian citizen below 18 years of age can apply for a minor Demat account. However, the parent or legal guardian has complete authority over the Demat account till the minor becomes an adult.
Now that you understand the eligibility for a minor dematerialisation account, let us discuss the documents required. When someone above 18 years of age applies for a new Demat account, they go through the KYC (Know Your Customer) process. However, Demat account providers have to verify the identity of the individual and their parent/legal guardian for a minor dematerialisation account. It is why there is dual KYC for minor dematerialisation accounts in India. Certain KYC documents must be submitted by the minor and the parent or legal guardian. The Demat account request is cancelled in the absence of KYC documents.
You can upload the KYC documents on the digital portal when applying for a minor Demat account online. Here are the documents required for a minor dematerialisation account in India:
PAN card of the parent or legal guardian
Aadhar card of the minor
Aadhar card of the parent or legal guardian
Birth certificate of the minor
Bank account details/statements of the minor (if any)
Minors are not required to produce income proof to open a minor dematerialisation account. Some brokers or DPs might ask for additional documents to open a new Demat account.
Rules of Minor Demat Account
There are certain rules associated with minor dematerialisation accounts in India. For instance, a minor cannot buy or sell shares via a Demat account. However, parents and legal guardians can transfer shares to a minor dematerialisation account as a gift. Also, the management of a minor dematerialisation account is in the hand of the parent or legal guardian. It continues till the minor becomes 18 years of age. The registered parent or legal guardian makes all major Demat account decisions. For the same rationale, it is said that the parent or legal guardian opens a Demat account on behalf of a minor.
Once a minor becomes a major, a request for full ownership is submitted to the DP or broker. Upon the approval of the Demat account provider, the individual gets full ownership of the Demat account. Also, the minor Demat account is closed, and a regular Demat account is opened. Even though there are investment restrictions, minors are allowed to hold different securities. Besides public shares, minors can hold bonds, mutual funds, and other securities in their Demat accounts. The broker or DP will inform you about the applicable rules while applying for a minor account with demat.
What is the Process of Online Minor Demat Account Opening?
You don’t have to go through a cumbersome process to open an online minor dematerialisation account in India. Thanks to digitisation, many brokers and depository participants allow minors to apply for Demat accounts online. You can also visit the physical office of the Demat account provider to submit your application. However, the offline account opening process might take several days. Not to forget, you will have to visit the broker or DP multiple times with several documents.
You can start by finding the minor account with demat application on the official website of the DP or broker. You might be asked to verify your contact details by confirming the One Time Password (OTP) received on your mobile number. You must provide your name, age, email address, and other details in the Demat account application. Personal details of both the applicant and the parent will be updated on the official website. Once all details are filled in, it is time to complete the KYC verification for a minor account with demat.
You can upload the KYC documents required for a minor dematerialisation account online. It is crucial to note that only original documents must be uploaded on the Demat account provider’s website. When done, submit the Demat account application and wait for the provider’s response. The broker or DP will forward the minor dematerialisation account credentials. The parent or legal guardian can use the credentials to manage the Demat account on behalf of the minor.
Benefits of a Minor Demat Account
Similar to regular Demat accounts, minor accounts also have their benefits. Here are the benefits of minor Demat accounts in India:
Easy Transfer of Shares
Parents might want to transfer some securities in the name of their children. They can do so by opening a minor dematerialisation account for their children. You are allowed to transfer securities to a minor dematerialisation account as a gift.
Parents can impart financial education to children at a very young age. When children have minor dematerialisation accounts, they get to learn the basics of trading at a young age.
Minor dematerialisation accounts allow individuals to start their investment journey early. They might have a diverse or stable portfolio when they turn 18 years of age.
Many parents want to save for their children’s future. They can do so by making long-term investments on behalf of their children. The securities transferred to a minor dematerialisation account can be used for the child’s education, marriage, or any other purpose.
Since the minor might hold securities for the long term, there are chances of capital appreciation. The account holder might get multi-fold returns after becoming an adult.
What Are the Limitations Applicable to a Minor Demat Account?
There are certain limitations applied to minor account with demat in India. For instance, a minor cannot manage their Demat account before turning 18 years of age. The Demat account of a minor must be managed by the parent or legal guardian. For the same rationale, the broker or DP collects the legal guardian’s or parent’s details during the account opening process. The parent makes all major decisions regarding the minor dematerialisation account.
There are investment restrictions on a minor dematerialisation account. Minors cannot buy or sell shares, bonds, or mutual funds by themselves. However, they can receive securities in their Demat accounts as gifts. Only equity delivery traders are allowed for minors. They cannot indulge in intraday or derivative trading with a minor dematerialisation account. Since an online trading account cannot be linked with a minor dematerialisation account, one cannot make execute trades.
What Happens to the Demat Account When a Minor Turns 18?
When a minor turns 18, their Demat account is no longer operational. It means the minor Demat account is no longer active, and the services are stopped. The account holder must apply for a new Demat account with the broker or DP and transfer the securities to the new account. In short, the account holder must apply for a regular Demat account after turning major. When you apply for a regular Demat account, documents of the parent are not required.
You might be worried about the shares held within a minor dematerialisation account. The broker or DP will rightfully transfer the shares to the new Demat account. A minor can make trading decisions after turning 18. The Demat account service provider will take care of the further process.
An Indian citizen can open a Demat account, irrespective of their age. It includes minors that are below 18 years of age. However, a minor will require the support of the parent or legal guardian to open a Demat account.
Minors are not allowed to buy and sell public shares in India. Minors cannot indulge in intraday, derivative, or any other type of trading. Only equity delivery trade is allowed for a minor Demat account in India.
A minor is not allowed to make trading decisions in India. For the same rationale, the minor account with demat is managed by the parent or legal guardian. Trading can only be done when a minor turns 18 years of age.
KYC verification is mandatory for all Demat account applicants in India. For a minor Demat account, there is a dual KYC rule in India. Both the parent/legal guardian and minor must submit their KYC documents to the Demat account service provider. Before offering services, KYC allows the broker or DP to confirm your identity, address, and other details.