If you are a parent or guardian who is interested in investing in the stock market on behalf of your child, you may have heard of a minor demat account. A demat account is a digital account that holds your investments in electronic form. A minor demat account is a type of demat account that is opened in the name of a minor. In this article, you will learn what a minor demat account is, how to open one, and how it works.
A minor demat account is a demat account that is opened in the name of a minor. In India, a minor is a person who is under the age of 18 years. The account is managed by the parent or guardian of the minor until the minor reaches the age of majority. A minor demat account can only be used for trading in equity delivery. Trading in equity intraday, stock or currency derivatives are not allowed for minors.
To open a minor demat account, you will need to provide documentation from the parent or legal guardian. The account opening process is similar to that of a regular demat account. Once the account is opened, the parent or guardian can transfer shares to the minor’s demat account as a gift. The shares can then be sold when the minor becomes a major. It is important to note that a minor cannot manage their own demat account and it will be operated by the parent or guardian until the minor becomes a major.
Key Takeaways
- A minor demat account is a type of demat account that is opened in the name of a minor and managed by the parent or guardian until the minor reaches the age of majority.
- A minor demat account can only be used for trading in equity delivery and trading in equity intraday, stock or currency derivatives are not allowed for minors.
- To open a minor demat account, the parent or legal guardian will need to provide documentation and the account opening process is similar to that of a regular demat account.
Understanding Minor Demat Accounts
Definition and Purpose
A Minor Demat Account is a type of Demat Account that is opened in the name of a minor, generally by their parent or legal guardian. It allows minors to hold securities such as stocks, bonds, and mutual funds electronically. A Demat Account is similar to a bank account, but instead of holding money, it holds securities in electronic form.
The purpose of a Minor Demat Account is to provide a platform for a child’s early financial planning. It allows parents/guardians to better plan their children’s finances by investing in equity stocks and mutual funds which often provide better returns than other investment instruments. A Minor Demat Account also helps inculcate financial knowledge in children at a young age.
Eligibility Criteria
To open a Minor Demat Account, the minor must be below the age of 18 years and must have a parent or legal guardian to act as the custodian of the account. The account can be opened with any registered Depository Participant (DP) in India.
According to ICICI Direct, a minor cannot open a Minor Demat Account on their own. The stockbroker will require documentation from the parent or legal guardian. A minor can only trade in equity delivery using the Minor Demat Account. Equity intraday trading as well as stock or currency derivatives are prohibited for minors.
It is important to note that the Minor Demat Account will be converted into a regular Demat Account once the minor turns 18 years old. The minor will then have complete control over the account and can operate it independently.
In summary, a Minor Demat Account is a great way to introduce children to the world of finance and investment. It provides a platform for early financial planning and helps inculcate financial knowledge in children at a young age.
Opening a Minor Demat Account
If you want to open a Demat account for your child who is below 18 years of age, you can do so by opening a minor Demat account. Here are the steps you need to follow:
Required Documents
To open a minor Demat account, you will need to submit the following documents:
- A copy of the child’s birth certificate or passport as proof of age
- A copy of the child’s PAN card
- A copy of the parent or legal guardian’s PAN card
- A copy of the parent or legal guardian’s address proof, such as a driving license or passport
- A passport-sized photograph of the child and the parent or legal guardian
The Role of the Guardian
As a parent or legal guardian, you will be the guardian of the minor Demat account. You will be responsible for all the transactions that take place in the account until the child becomes a major. You will also be required to sign all the necessary documents on behalf of the child.
It is important to note that a minor can only trade in equity delivery using the minor Demat account. Equity intraday trading as well as stock or currency derivatives are prohibited for minors. Also, the minor’s Aadhaar needs to be linked to a mobile number in order to open the Demat account online.
Once you have submitted all the necessary documents, the stockbroker will verify the details and open the minor Demat account. The account will be linked to the parent or legal guardian’s Demat account, and all the shares bought or sold will be credited or debited to the parent or legal guardian’s account.
Operation and Management
Access and Control
When opening a minor demat account, the parent or legal guardian is required to provide documentation for the account. Once the account is opened, the parent or guardian has access and control over the account until the minor reaches the age of majority. The parent or guardian can buy and sell securities on behalf of the minor and manage the account in terms of deposits and withdrawals.
It is important to keep in mind that the minor does have some level of control over the account. The minor can choose to sell or transfer the securities held in the account once they reach the age of majority. Therefore, it is important for the parent or guardian to educate the minor on the importance of investing and managing their finances responsibly.
Restrictions and Limitations
A minor demat account has certain restrictions and limitations. For instance, a minor can only trade in equity delivery using the minor demat account. Equity intraday trading as well as stock or currency derivatives are prohibited for minors. Intraday and F&O trading is also not allowed in minor accounts.
Moreover, the guardian or parent cannot pledge or hypothecate securities in the minor demat account. They also cannot avail of margin trading facilities against securities held in the minor demat account.
It is important to note that the Securities and Exchange Board of India (SEBI) has set certain guidelines for the operation and management of minor demat accounts. These guidelines are aimed at protecting the interests of the minor and ensuring that the account is managed in a responsible manner.
Transition to Major Demat Account
When a minor turns 18 years old, the Demat account in their name automatically becomes a major account. This transition is important as it allows the now-major to independently manage and make transactions in their Demat account. However, there are a few things to keep in mind during this process.
The Conversion Process
To convert a minor Demat account to a major account, you need to follow a specific process. The account holder needs to submit a written request to the Depository Participant (DP) to change the status of the account from minor to major. Along with the request, the account holder needs to provide proof of identity and address. After the DP verifies the documents, the account status is changed to major.
Legal and Regulatory Changes
Once the account is converted to a major account, there are a few legal and regulatory changes that come into effect. The minor’s guardian is no longer authorized to operate the account, and the now-major account holder becomes the sole operator of the account. The major account holder can also open a new Demat account in their name and transfer the securities from the minor account to the new account.
It’s important to note that income from investments in a minor Demat account is taxed under the guardian’s income if it exceeds the exemption limit. However, after the account is converted to a major account, the account holder becomes responsible for paying taxes on the income earned from the account.
In conclusion, the transition from a minor Demat account to a major account is a straightforward process, but it’s important to follow the correct procedure and be aware of the legal and regulatory changes that come into effect.
Frequently Asked Questions
How can one open a Demat account for a minor online?
Opening a Demat account for a minor can be done online through various stockbrokers. The process is similar to opening a regular Demat account, but the account will be in the minor’s name and operated by a guardian until the minor becomes a major. The guardian can be the minor’s father, mother, or any other person appointed by the court.
What are the regulations governing minor Demat accounts?
Minor Demat accounts are governed by the regulations set by the Securities and Exchange Board of India (SEBI). According to SEBI, a minor can only trade in equity delivery using the minor Demat account. Equity intraday trading, as well as stock or currency derivatives, are prohibited for minors.
What advantages does a minor Demat account offer?
A minor Demat account offers several advantages, including better financial planning, as equity stocks and mutual funds often provide better returns than other investment instruments. It also helps inculcate the habit of saving and investing in children from an early age.
Which documents are necessary to set up a Demat account for a minor?
To open a Demat account for a minor, the stockbroker will require documentation from the parent or legal guardian, including the minor’s birth certificate, PAN card, and address proof. The guardian’s PAN card and address proof will also be required.
Up to what age can an individual be classified as a minor for Demat account purposes?
An individual can be classified as a minor for Demat account purposes until they reach the age of 18 years in India.
How are earnings from a minor’s Demat account taxed?
The earnings from a minor’s Demat account are taxed as per the Income Tax Act. If the minor’s total income exceeds the basic exemption limit, the earnings will be added to the parent’s income and taxed accordingly. However, if the minor’s income is below the basic exemption limit, no tax will be applicable.
