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.
This has led to queries about the feasibility and legality of opening demat accounts for minors in India. In this concise guide, we will explore the process of opening and managing a demat account for minors, including its legal framework, eligibility criteria, documentation required, limitations, and benefits.
Can a Minor Open a Demat Account?
Despite the Indian Contracts Act of 1872 prohibiting minors from entering into financial contracts, the 2013 Companies Act permits any Indian citizen, regardless of age, to own shares in publicly traded companies. This legal provision allows for the opening of demat accounts for minors, with certain restrictions and the oversight of a parent or guardian.
Who Can Open a Demat Account for a Minor, and What are the Eligibility Criteria?
- Any minor, i.e., an individual below the age of 18, can have a demat account.
- The demat account must be opened and managed by a parent or legal guardian on behalf of the minor.
What Documents are Needed to Open a Demat Account for a Minor?
To open a demat account for a minor, the following documents are typically required:
- PAN card of the parent/legal guardian.
- Aadhar card of the parent/legal guardian.
- Birth certificate of the minor.
- Bank account details of the parent/legal guardian.
How Can a Minor's Demat Account be Opened?
Steps involved in opening a minor demat account:
Online Procedure :-
1. Visit the website of a stockbroker endorsed by CDSL or NSDL.
2. Provide basic information and complete the necessary forms.
3. Submit KYC documents of both the minor and the parent/legal guardian.
4. Once all documents are verified, the minor demat account will be opened.
Offline Procedure:-
1. Fill out the demat application form.
2. Attach photocopies of ID and address proofs (originals required for verification).
3. Execute the client agreement with the broker/DP.
4. Await verification.
5. Upon approval, receive the BOID, UCC, and access credentials for online trading (2 days online, 5-7 days offline).
6. Required documents include minor’s (Birth certificate, PAN card, Address proof & Bank statement) and parent/legal guardian’s (PAN card & Address proof)
Can a Trading Account be Opened in the Name of a Minor?
A trading account can be opened in the name of a minor only for the sole purpose of selling securities which the minor has acquired through investment in IPO, inheritance, corporate action, off-market transfers under the following reasons:
- Gift / Donation
- Transfer between family members
- Implementation of Government / Regulatory Directions or Orders
However, such an account will be operated by the natural guardian until the minor becomes of legal age.
Can buying and selling of securities be done in minor’s trading account?
A minor cannot enter into a contract with a stock broker to purchase or sell any security. However, a trading account in the name of a minor can be opened only for the sole purpose of selling of securities possessed by the minor in the manner specified above.
Can a Minor's Demat/Trading Account be Continued When He/She Becomes a Major?
Yes. A minor’s demat/trading account can be continued when the minor becomes a major. However, upon attaining majority, the erstwhile minor should confirm the balance in his/her account and complete formalities as are required for opening a demat/trading account to continue using the same account(s).
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.
What are the Tax Implications for a Minor's Income?
A minor can earn two types of income: capital gains and dividend income. These earnings are subject to tax implications where they are clubbed with the income of the higher-earning parent, and the parent assumes the entire tax liability. Capital gains and dividend income are taxed at the parent’s applicable slab rate under the "income from other sources" head.
Disclaimer:
The above information/amendment/provision is to be used for ready reference only and not to be construed as legal advice.
