Investing for the future - Minor Demat Account

Brokerage Free Team • March 11, 2024 | 11 min read • 705 views

Investing in the stock market requires a demat account, which serves as a prerequisite. Without it, trading shares or transferring them is impossible. While it's common knowledge that individuals over 18 can open demat accounts, few realize that minors can also have one. Let's explore demat accounts for minors in detail.

 

Why Open a Demat Account for Minors?

 

Opening a demat account for minors allows for their financial security by investing in various securities. This includes stocks, bonds, mutual funds, government securities, and ETFs. It enables proactive financial planning for a child's future.

 

How to Open a Demat Account for Minors

 

The process is straightforward but requires a guardian, typically a parent, to act on behalf of the minor. The guardian handles all paperwork, including proof of identity, address, age, and PAN details for both themselves and the minor. Once furnished, the Depository Participant (DP) verifies the details and creates the demat account for the minor.

 

Important Points to Note:

 

- If the minor's Aadhaar isn't linked to a mobile number or if they lack Aadhaar, the account must be opened offline. Online opening is possible if the mobile number is linked.

- Required documents for online account opening include PAN, Aadhaar, proof of date of birth, minor's photo, bank statement, legal guardian letter (if applicable), and guardian's PAN and address proof.

 

Know Your Customer (KYC) and In-Person Verification (IPV)

 

KYC is mandatory for opening a demat account, ensuring customer identity verification. IPV, either via webcam or physical verification, is also essential to verify the person and documents submitted.

 

Checking KYC Status

 

You can check your KYC status by visiting cvlkra.com, entering your PAN, and submitting to fetch the status. This helps identify the KYC Registration Agency (KRA) with which your KYC is registered.

 

In-Person Verification (IPV)

 

IPV verifies that the person opening the account matches the submitted documents. Brokers conduct video IPV to adhere to regulations.

 

Once all documents are prepared, email soft copies to Designated Broker. Forms will be reviewed, and any necessary corrections made before couriering the documents.

 

This comprehensive guide provides insights into demat accounts for minors, emphasizing the importance of financial planning from an early age.

 

FREQUENTLY ASKED QUESTIONS ON DEMAT/TRADING ACCOUNT FOR MINORS

 

Can a demat account be opened for a minor?

Yes. Demat account can be opened in the name of a minor. The account will be operated by a guardian till the minor becomes major. Guardian has to be the father or in his absence mother. In absence of both, father or mother, the guardian can be appointed by court.

 

Can minor be a joint holder in another demat account?

No. Minor cannot be a joint holder in a demat account.

 

Can a trading account be opened in the name of a minor?

Trading account can be opened in the name of the minor only for the sole purpose of sale of securities which minor has possessed by way of investment in IPO, inheritance, corporate action, off market transfers under the following reason:

i. Gift / Donation

ii. Transfer between family members

iii. Implementation of Government / Regulatory Directions or Orders

 

However, such an account will be operated by the natural guardian till the minor becomes a major.

 

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.

 

Whether the natural guardian and the minor are required to comply with know your client (KYC) norms at the time of opening demat/ trading account for the minor?

Yes. The guardian and the minor have to strictly comply with the applicable KYC norms.

 

Can a minor’s demat/ trading account be continued when he/she becomes major?

Yes. A minor’s demat/ trading account can be continued when the minor becomes major. However, on attaining majority, the erstwhile minor should confirm the balance in his/her account and he/she has to complete formalities as are required for opening a demat/ trading account to continue in the same account/s.

 

Are there any restrictions imposed on a demat account for minors?

Yes, there are certain restrictions that are imposed on minor demat accounts when compared to regular demat accounts. Here’s a brief look at some of them:

  • Minor demat accounts are not authorized to participate in the trading of certain segments such as intraday and derivatives like futures and options.
  • Minor demat accounts are permitted to operate only in the equity delivery segment.
  • Minor demat accounts are not allowed to be linked to a trading account.

What should minors do once they turn 18?

When a minor in possession of a demat account turns 18, he or she is required to furnish a new set of Know-Your-Customer (KYC) documents and a duly-filled KYC form with his or her own signature to the Depository Participant (DP). In addition to these documents, the minor would also have to submit a duly-filled new account opening form. Upon receiving the above documents, the DP would scrutinize and verify the details mentioned therein. After successful verification, the DP would remove the guardian’s details and replace it with that of the minor.

The above process for conversion of a demat account for minors to a regular demat account is only applicable if the account does not contain the word ‘minor’ in the account holder’s name. If the word ‘minor’ is present in the account holder’s name, then the demat account has to be surrendered and a new one has to be opened.

 

What are the account opening and Account Maintenance Charges (AMC) for a minor account?

There are no account opening and Account Maintenance Charges (AMC) for a minor account.

 

How long does it take to open a minor account?

The minor account is opened within 48 hours of verifying the documents.

 

Can the minor account be opened completely online?

Yes, the minor account can be opened completely online if reqquirements are satisfied.

 

Can funds be added and withdrawn from the minor account?

Yes, funds can be added and withdrawn from the minor account. However, these funds cannot be used to buy securities. It can only be used to pay the applicable charges like transaction charges, transfer fees, DP charges etc. To learn about all the charges that are applicable, visit Designated Broker.com/charges#tab-equities.

 

Can a minor account be opened online if they are an NRI?

No, the minor account must be opened offline if they are an NRI.

 

Should the guardian have an account with Designated Broker?

The guardian must have an account with Designated Broker to open a minor account online. If the guardian does not have one, they can open an account online.

 

What are the tax implications for a minor account?

A minor can earn only two kinds of income i.e. capital gains and dividend income. This income is clubbed with the income of the higher-earning parent, and they will have to bear the entire tax liability on the same.

 

A) Capital gains: If a minor earns capital gains, those will be clubbed with the income of the higher-earning parent and they will have to bear the entire tax liability on the same. If the holding period is more than 12 months, the gains will be classified as long-term and taxed at 10%, while a short-term capital gains (STCG) tax of 15% is applicable in case the holding period is less than 12 months. In case shares were acquired through gifts or transfer of shares, holding period is calculated as per the date on which the shares were originally purchased by the previous owner.

B) Dividends: Similar to capital gains, dividend income earned by a minor will be clubbed in the hands of the higher-earning parent and it will be taxed at their applicable slab rate under ‘income from other sources’ head. Remember, if the dividend received in the entire financial year exceeds ₹5000, a 10% TDS will be deducted by the company paying dividends. However, the parent can claim the credit of the TDS while filing the ITR.

 

Here are some other key considerations:

  1. Once the income of a minor is clubbed in the hands of one parent, the income shall be clubbed in the hands of the same parent for the succeeding years. Income here includes both profits and losses. Hence, the losses will also be clubbed and the parent can use them to set off against other gains and even carry forward them.
  2. The parent can also claim a tax exemption of up to ₹1,500 per child on the clubbed income, only if they are filing under the old regime.
  3. Here, a child in relation to an individual includes a stepchild and an adopted child as well.
  4. In case of a divorce, the income will be clubbed in the hands of the parent who has custody of the child.

 

What documents are required to open a NRI-minor account ?

 

An NRI-minor account can only be opened offline, unlike resident-minor accounts that can be opened online. The documents required to open an NRI-minor account vary based on the minor's and the guardian's KYC. If the KYC is not registered, the following documents are required:

 

  • NRI account opening form.
  • KYC application form for the minor and the guardian.
  • CKYC form for the minor and the guardian.
  • Demat Debit and Pledge Instruction form is a document that allows a broker to debit the securities from the client’s demat account and deliver them to the exchange. The client does not have to enter the CDSL T-PIN and OTP to sell shares once the DDPI is submitted. However, DDPI is optional. If clients do not wish to submit the DDPI, CDSL T-PIN can be used for authorisation.
  • Foreign Account Tax Compliance Act (FATCA) declaration (PDF). Tax Identification Number (TIN) must be filled in the FATCA declaration.
  • Declaration of P.O. box of your country of residence.
  • Foreign Exchange Management Act (FEMA) declaration form.

 

Supporting Documents

  1. Passport-size photographs of the minor and the guardian to affix on the applications.
  2. Self-attested and notarised copy of the minor and guardian’s passport:
  3. In case of an Indian passport, a copy of the valid passport with the place of birth as India and a copy of the valid visa.
  4. In case of a foreign passport, copies of the valid passport and the PIO or OCI card.
  5. PAN copy of the minor signed by the guardian and notarised.
  6. PAN copy of the guardian self-attested and notarised.
  7. Overseas address proof for the minor notarised and signed by the guardian. Any one of the following: banker letter attested by the bank, Foreign passport in the name of the minor.
  8. Overseas address proof for the guardian self-attested and notarised. Any one of the following: Driving licence, Foreign passport, Utility bills, banker letter attested by the bank, rental agreement, lease or sale deed.
  9. A cancelled cheque or bank statement of the NRE or NRO bank account in the name of the minor.
  10. Additional minor documents: Birth certificate copy, school leaving certificate, and mark sheet issued by the higher secondary board.
  11. Self-attested copy of the India address proof, if available, for the guardian and minor.
  12. Any one of the following income proof of the guardian:
  • Bank statement or passbook for the last six months.
  • The latest salary slip.
  • Form 16 or Income Tax Return (ITR) acknowledgement.
  • Net worth certificate.
  • Statement of demat holdings.

 

The documents need to be notarised by the Indian embassy or any other competent authority, such as authorised officials of overseas branches of scheduled commercial banks registered in India , public notaries, court magistrates, judges, or the Indian embassy or consulate general in the country that they reside in the country where the NRI resides. The attesting authority should affix a verified with original stamp, name, designation, authority or employee code, signature and date on the said documents.

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