Indian parents and guardians are known for leaving no stone unturned in helping their children achieve their ambitions. Investments in stocks, mutual funds and other assets help people grow a corpus large enough to cover significant expenses like higher education and weddings. A minor Demat account is often used to hold such securities electronically for children.
Want to know about the rules and requirements for opening Demat accounts for children? You have come to the right place as we will explain what a minor Demat account is in India and how you can use it to secure your children’s future.
About Minor Demat Account and How It Works
Demat accounts work like bank accounts but for electronically storing securities, such as shares, bonds, government securities, futures, options, mutual fund units and ETFs (exchange-traded funds). By Dematerialising securities, they remove the hassles of physically handling and storing securities that used to happen in the past. A minor Demat account is simply an account held in the name of an individual aged below 18 years.
These accounts come with some restrictions, unlike regular Demat accounts, because minors are not allowed to trade or speculate. Therefore, though these Demat accounts are in the name of minors, only their parents or legal guardians can operate them. The parent or guardian makes all the important decisions, including managing, opening and closing the account on the child’s behalf.
There are some additional rules and restrictions you need to know when learning all about minor Demat accounts. Check these rules below.
Minor Demat Account Rules and Regulations
In India, there are two main regulations governing whether minors can open and operate Demat accounts. Go through them to understand the minor Demat account meaning:
- According to the Indian Contracts Act, 1872, minors in India cannot take part in or sign financial contracts. As a result, they are unable to buy or sell shares on their own.
- According to the Companies Act, 2013, any individual, regardless of his/her age, can own stocks in any publicly owned company. As a result, minors can technically own shares, but they cannot trade them.
Minor trading accounts can only be used to sell securities that a child owns. They can come into possession of these securities through investment in an IPO (Initial Public Offering), corporate action, off-market transfer, gift, donation, transfer from a family member, government regulations or court orders.
A minor Demat account only allows the transfer of equity securities in the above-listed ways. Intraday trading, currency trading and derivative trading are disallowed. In addition, parents cannot directly buy shares and other securities in the market through these accounts.
Minor Demat Account Eligibility Criteria
Go through the points below to understand who can open a minor Demat account:
- Either a child’s father or mother can operate the Demat account in the minor’s name. In the absence of either parent, a court-appointed legal guardian can operate this account.
- As minors can actively engage in trading, their parents or guardians must oversee the transfer on their behalf. The account operator can only sell securities held in the account.
- The natural guardian can continue account operations until the minor attains 18 years of age.
- Both the guardian/patent and the minor must strictly comply with applicable KYC (know your customer) regulations. Upon reaching adulthood, the minor can continue the minor Demat account after completing KYC formalities again.
Pros and Cons of Opening a Demat Account for a Minor
In the following pointers, we will cover both the benefits and limitations of minor Demat accounts:
Pros
- By investing in securities like stocks and mutual funds, you can build long-term wealth for your children.
- With their own Demat accounts, children are introduced to financial literacy at an early stage, which sets them up for success in later life.
- Older family members and relatives can gift securities instead of cash on auspicious occasions.
- Starting at an early age leverages the maximum power of compounding, growing small savings to a substantial corpus.
- Upon attaining the majority, children can get access to a large sum of money and use it for higher education or advancing their careers.
Cons
- There are severe restrictions on these Demat accounts as they prevent the buying of many types of securities.
- Intraday trading, currency derivatives, and other trading activities are not allowed in these accounts.
- You cannot connect a trading account to these Demat accounts.
Minor Demat Account Documents Required
To open a minor’s Demat account, both the minor and his/her legal guardian must submit separate KYC forms along with a single account opening form. The following documents are usually required for verification:
- PAN card of both the minor and guardian (mandatory)
- Proof of identity, such as voter ID, passport, Aadhaar card, driving licence
- Proof of address, such as Aadhaar card, utility bills, ration card
- Court order appointing a legal guardian (in the absence of either parent)
- The minor’s birth certificate for the date of birth proof
- Bank account details/statements of the minor (if any)
- Bank details/statements of the guardian
How Can You Open a Demat Account for a Minor?
Follow the given steps to open a minor Demat account for your child:
Step 1: Choose any DP (depository participant) registered with either NSDL (National Securities Depositories Limited) or CDSL (Central Depository Services Limited) to open a Demat account.
Step 2: Go to the DP’s official website and click on the option to ‘Open a Demat Account’.
Step 3: Fill out the necessary details, such as the minor’s name, your name, age, email address, mobile number, etc.
Step 4: Complete and submit the KYC form for both yourself and your child.
Step 5: Submit the required documents. Upload images of the original documents in the specified format.
Step 6: Wait for approval from the DP, and save the login credentials shared with you by email to open the minor Demat account.
Final Words
As minors are not allowed to trade in India, only their parents or legal guardians can open a minor Demat account on their behalf. Knowing what a minor Demat account is allows the parents to save for their child’s future while building financial knowledge and discipline for the child. As a result, the child starts his/her financial journey early.
