A demat account is mandatory for investing in shares, exchange traded funds (ETFs) and listed bonds. There may be parents who want to invest in shares in the name of their kids. For this, they need to open a demat account for their minor child.
Here is the process of opening a demat account for minor children, documents required and other things to keep in mind.
Minimum age to open a minor’s demat account
“There is no minimum age restriction for opening a demat account for a minor. However, there are organized procedures one must follow to open a minor’s demat account. It is crucial to understand that a minor’s demat account can never be opened as a joint account. It has to be opened with a parent or a guardian,” says Sidhavelayutham M, Founder & CEO, Alice Blue, a stockbroker.
Documents required for opening minor’s demat account
As the account has to be opened with a parent or a guardian, documents of both parent and child will be required. Here’s a list of documents that are required:
- PAN of the parent,
- Address proof of the parent. One can submit Aadhaar, passport, driving license, voter ID card and any other relevant government document of the parent for address verification,
- Birth certificate of the minor specifying date of birth of minor and the name of the parents for relationship verification. If the name of parents is not available on the birth certificate, then other documents specifying both (date of birth and relationship) can be submitted. One can submit the passport of the minor, Baal Aadhaar or school transfer certificate (TC) or marksheet issued by the board (ICSE, CBSE, WBSE, etc.),
- Parents must undergo SEBI’s KYC process. The parent must also not be suspended or blocked from opening a demat account or operating in the stock market.
- The bank account of the minor is mandatory to receive redemption/sale proceeds.
“If you have not opened minor’s bank account, then parent can give their bank details. However, at the time of redemption, it is essential to have a bank account in the child’s name. Any funds/securities redeemed/sold will be credited only to the minor’s bank account, irrespective of the source of the initial investment,” says Bhavik Gandhi- Head- Operations, Mirae Asset Capital Market, a stockbroker.
Also read: How to open bank account in the name of a minor.
“The bank account linked to a minor’s demat account cannot have an overdraft facility, which is a precautionary measure to protect against potential financial risks. It’s worth noting that minor bank accounts by default do not offer overdraft facilities. Therefore, if you use a minor bank account to link it to a demat account, you won’t encounter any issues in this regard,” explains Tejas Khoday, CEO and co-founder of FYERS, a stockbroker.
Some stockbrokers offer an online account opening process for opening minor’s demat account. While some stockbrokers offer an offline process only. Do check with your choice of stockbroker if their process is online or offline.
Things to know about opening a minor’s demat account
- Signature on the application form: In the case of online application the signature of the parent will be either done online or a scanned copy of signature has to be uploaded. Some stockbrokers also offer an Aadhaar OTP signature process. The parent’s Aadhaar number is required for this. In the case of offline application, the parent must sign the account opening form on behalf of the minor wherever required.
- Photo: In both online and offline minor’s demat account applications, photos of the minor and parent are required to be uploaded/pasted. There is no need for joint photos. Separate photos of the minor and parent will work.
- KYC, PML, FATCA compliance: Know your customer (KYC), Prevention of money laundering (PML), FATCA compliance is a must for both the parent and minor. In online applications, there will be dedicated declaration pages for all the compliances. In offline applications, the compliance declarations are two pages long.
“In offline applications minor’s details need to be filled out on the 1st page of the KYC form. The guardian or parent needs to sign across the Minor’s photograph on this page and guardian’s or parent’s details need to be filled on the 2nd page of the KYC form,” says Sidhavelayutham M.
Limitations of opening minor’s demat account
It must be understood that a stockbroking account has two types of accounts-trading and demat account. A trading account is required to be opened for buying and selling shares, Exchange Traded Funds (ETFs), mutual funds and other securities on the stock exchange. Demat account is used for holding the securities bought or gifted by others. Both the accounts are needed to buy, sell and hold the securities.
No securities can be bought from the stock market through a minor’s demat account as by default the trading account of the minor is disabled. This is because the Indian Contracts Act of 1872 states that a minor cannot sign financial agreements. However, securities can be sold from a minor’s demat account only in three exceptional cases mentioned below.
Unlike a normal demat account, a minor’s demat account comes with several restrictions.
- Control of the demat account: The control of the demat account will rest with the parent. A minor cannot manage their own demat account. “A minor’s demat account will be operated by the biological/legal guardian till the minor becomes a major,” says Sidhavelayutham M.
- Cannot buy directly from stock market: Stock and currency derivatives segment is closed for a minor’s demat account. Intraday trading is also not possible through a minor’s demat account. Equity delivery segment is the only open and active segment for minor demat accounts. “A minor cannot buy any security (shares, mutual funds etc.) directly from the stock market through a demat account. A minor demat account can only receive and sell securities held in the demat account. The securities can be received by way of gift or inheritance or legal order,” says Khoday. It is worth noting that there is no such restriction for a minor to invest in mutual funds physically (i.e., without demat mode).
What are the exceptional situations when a minor a minor can sell securities through minor demat account?
According to SEBI rules, the only time securities can be sold through a minor’s demat account is in the below-mentioned three situations:
- Inheritance: A minor might inherit their family shares. “Inherited shares can be sold through a minor’s trading cum demat account,” says Sidhavelayutham M.
- Gift: Shares received by way of gift can be sold through the minor’s trading cum demat account.
- Legal order: Shares received in demat account of minor due to any government, or regulatory or court or any other legal authority’s order can be sold through a minor’s trading cum demat account.
“If investments or shares are shown as a gift to a minor child, any income generated from such an investment or shares will be taxable in the hands of the higher-earning parent. If the shares or investments are received as a gift from someone other than the parents, then the capital gain shall be taxable in the hands of the minor itself,” says Akhil Chandna, Partner, Grant Thornton Bharat, a tax and business consultancy company.