Investing is no longer just for adults! Many parents today want to introduce their children to the world of investing early on. But a common question arises—Can a minor open a Demat account? The answer is yes, but with a few conditions.
A minor Demat account is essential for holding shares in electronic form, making stock market investments easier and safer. While minors cannot actively trade, they can still have a Demat account for minors operated by a guardian. In this post, we’ll break down how a minor can open a Demat account, the benefits, limitations, and important rules to know.
What is a Demat Account?
A Demat (Dematerialized) account is an account that allows investors to buy, sell, and hold shares and securities in an electronic format. In India, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are the two depositories that provide Demat account services.
A Demat account for minors is a mandatory requirement for trading in stocks, investing in Initial Public Offerings (IPOs), and managing securities efficiently.
Key Points to Remember:
- A minor cannot independently operate the Demat account.
- The account must be opened and managed by a guardian.
- No intraday or derivative trading is allowed.
- Once the minor turns 18, the account must be converted to a regular Demat account.
Can a Minor Open a Trading Account?
A trading account can only be opened in a minor’s name for limited purposes, such as:
- Selling securities obtained via inheritance, corporate actions, or family transfers.
- Applying for IPOs and holding shares until the minor becomes an adult.
Note: A minor cannot engage in active stock market trading.
Does a Minor Need a Bank Account for a Demat Account?
No, a minor does not need a separate bank account. The guardian can simply link the minor Demat account to their own bank account. However, all financial transactions will be considered as part of the guardian’s income for tax purposes.
How to Open a Minor’s Demat Account ?
Opening a Demat account for minors is a simple process but requires specific documents. Here’s a step-by-step guide:
1. Choose a Depository Participant (DP)
A Depository Participant (DP) is a financial institution that provides Demat account services. Examples include banks, brokerage firms, and online trading platforms.
2. Gather Required Documents
You will need the following documents:
- For the Minor:
- Birth certificate (as proof of age)
- PAN card (if available, otherwise the guardian’s PAN is used)
- Aadhar card (or other valid ID proof)
- For the Guardian:
- PAN card
- Aadhar card or address proof
- Bank details
- A passport-size photograph
3. Fill Out the Application Form
Visit the selected DP’s website or office and fill out the Demat account opening form. The guardian must sign the form on behalf of the minor.
4. Complete the KYC Process
The guardian must complete Know Your Customer (KYC) verification by submitting the necessary documents and completing in-person verification if required.
5. Account Activation
Once the documents are verified, the minor Demat account is activated, and the guardian can start managing investments on their behalf.
Restrictions & Guidelines for a Minor’s Demat Account
While minors can have a Demat account, there are a few important restrictions:
1. No Intraday or Derivatives Trading
Minors are not allowed to trade in futures, options, or intraday stock market activities. The account can only be used for delivery-based transactions (buying and holding shares).
2. No Joint Accounts Allowed
A Demat account for minors can only have one holder—the minor, with the guardian managing it. Joint accounts are not permitted.
3. Conversion to Regular Account at 18
When the minor turns 18, they must submit KYC documents to convert the account into a standard Demat account, allowing them to trade independently.
How to Apply for an IPO in a Minor’s Demat Account?
Most brokerage firms do not allow direct IPO applications through their platforms for minors. However, minors can apply for an IPO using the ASBA (Application Supported by Blocked Amount) process via net banking, using their minor Demat account details.
Income Tax Implications of a Minor’s Demat Account
- Any income earned through a Demat account for minors is clubbed with the parent’s income under Section 64(1A) of the Income Tax Act.
- The only exception is if the minor earns income through their own skill or talent (e.g., child actors, athletes, etc.).
Things to Consider Before Opening a Minor’s Demat Account
- Investment Strategy: Since trading options are limited, focus on long-term investments like blue-chip stocks or mutual funds.
- Tax Implications: Income from investments in a minor Demat account is clubbed with the parent’s income for tax purposes.
- Brokerage Charges: Different DPs have varying fees for Demat account for minors maintenance—compare options before opening an account.
Frequently Asked Questions (FAQs)
1. Can a minor have both a Demat and a trading account?
Yes, but the trading account can only be used for selling inherited securities or IPO investments. Active stock trading is not allowed.
2. Can we open a Demat account for minors as a joint account?
No, a minor’s Demat account can only have one holder, with a guardian managing it.
3. What happens to a minor’s Demat account when they turn 18?
The account must be converted into a regular Demat account, and the now-adult investor will need to complete full KYC requirements.
4. Do both the minor and guardian need to complete KYC?
Yes, both the guardian and the minor must comply with Know Your Customer (KYC) norms while opening the Demat account for minors.
5. Can a minor invest in mutual funds through a Demat account?
Yes, a minor Demat account can be used to invest in mutual funds, but redemption of funds requires the guardian’s approval.
Conclusion
Yes, a minor can open a Demat account in India, but it must be managed by a parent or legal guardian. While trading is restricted, it’s a great way to introduce children to investing and financial planning early in life. If you’re looking to secure your child’s financial future, opening a minor Demat account could be a smart move.
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