Demat accounts for minors: From benefits to restrictions, all you need to know

Demat accounts for minors: With the Indian economy on a trajectory of rapid expansion, the country's capital market has become increasingly attractive to both domestic and foreign investors. Interestingly, this trend isn't confined to adults; even minors are entering the fray, seeking to capitalise on the market's promising growth potential. But how can minors participate in this financial landscape? What is the minimum age requirement for opening a demat account?

This article delves into these questions and provides insights to assist in making informed decisions when considering opening a minor demat account.

Can a minor open a demat account?

As per the Indian Contracts Act of 1872, minors are prohibited from entering into financial agreements. However, under the Companies Act of 2013, any Indian citizen, regardless of age, is allowed to own shares in publicly listed companies. Thus, minors can legally open demat accounts in India.

Although a minor demat account is technically owned by the minor, they cannot actively engage in buying or selling shares. Instead, a parent or legal guardian must oversee the transfer of shares to the minor's demat account as a gift. Consequently, the responsibility of opening, closing, and managing the minor's demat account lies with the parent or legal guardian until the child reaches 18 years of age.

Read here: Demat account: How to choose the right depository participant?

How can a minor's demat account be opened?

Opening a minor's demat account involves a series of structured steps, although there's no minimum age requirement for it. To initiate the process online, you'll first need to visit the website of a stockbroker associated with either CDSL or NSDL. The broker will prompt you to provide basic information such as names, email IDs, and phone numbers before progressing.

Subsequently, you'll be asked to furnish KYC (Know Your Customer) details for both the minor and the parent or guardian. The requisite documents for opening a minor's demat account typically include:

• Proof of Identity (PAN card) for both the parent/guardian and the minor.
• Proof of Address (Aadhar card) for both the parent/guardian and the minor.
• The minor's birth certificate.
• Bank account details of the parent/guardian.

Once you've gathered all the necessary documents, you can submit them to the stockbroker. If the documents meet the broker's requirements, they'll proceed to open the demat account. One must note that a minor's demat account cannot be opened as a joint account.

Read here: How to transfer shares from one demat account to another? A step-by-step guide

What happens to the account once the minor reaches the age of 18?

Upon reaching the age of 18, a minor's demat account transitions into an inactive state. To reactivate it, the account holder must complete a new demat account opening application form and furnish the necessary documents. Unlike with a minor's demat account, there's no requirement for the guardian's or parent's signature in this process.

Existing shares from the minor's demat account will be transferred to the new account, granting the account holder full access to trade or invest across all segments, pending approval from the stockbroker.

Benefits of opening a demat account for a minor

Opening a minor's demat account not only offers an easy online process but also brings several benefits. Firstly, it enhances financial planning as mutual funds and equity stocks often yield higher returns compared to other investment options. Parents and guardians can efficiently manage their children's finances through this avenue, allocating funds for various future needs like college expenses, weddings, or career-related relocations. Moreover, it fosters financial literacy among children, introducing them to the realm of financial independence. As they delve into the intricacies of the stock market, youngsters develop crucial life skills essential for navigating the complexities of the world.

Read here: What is the difference between a demat and a trading account?

Restrictions while opening a demat account for a minor

Certain restrictions apply to demat accounts registered in the name of minors, outlined as follows:

Firstly, only equity trading is permissible. Guardians cannot engage in intraday trading or trade financial derivatives such as futures and options using a minor's demat account. The market's high volatility levels pose risks unsuitable for minors, limiting transactions solely to equities.

Secondly, opening a trading account in the minor's name is prohibited by financial regulations. Although brokerage firms typically consolidate trading and demat accounts, minors are barred from having trading accounts in their names.

Lastly, minors cannot be joint holders of a demat account. Distinct registration processes and regulatory frameworks differentiate demat accounts for adults and minors, precluding joint ownership arrangements in the latter case.

Read here: 10 key practices to follow to keep your demat account safe

Now equipped with the knowledge of the minimum age requirement and the process for opening a minor's demat account, it's an opportune moment to pave the way for your children's bright future. A minor's demat account serves as a platform to nurture and monitor funds earmarked for their future educational endeavors and other essential expenses.

Furthermore, this experience instills in children a heightened understanding of the significance of saving and investing money. Such financial literacy can provide a significant competitive advantage as they mature. Notably, in India, a substantial 76% of individuals surveyed demonstrated a limited grasp of financial fundamentals. In contrast, a child who grows up with an online demat account gains invaluable financial literacy from an early age, setting them apart in their financial acumen and preparedness for the future.

Read here: What are the charges associated with a demat account?

FAQs

What is a demat account for a minor?

A minor's demat account is a type of demat account opened in the name of a minor, usually by their parent or guardian. It allows minors to hold securities such as stocks, bonds, and mutual funds in electronic format.

What is the minimum age requirement to open a minor's demat account?

There is no specific minimum age requirement for opening a minor's demat account.

Can a minor operate the demat account on their own?

No, a minor cannot operate the demat account independently. Transactions must be authorised by the parent or guardian who acts as the registered holder of the account until the minor reaches adulthood.

Read here: How to open a demat account online with ease

Are there any restrictions on trading for minors?

Yes, there are certain restrictions. Only equity trading is permitted, and intraday trading as well as trading in derivatives like futures and options are not allowed.

What happens to the demat account when the child turns 18?

When the child reaches the age of 18, the demat account becomes inactive. The account holder must then complete a new account opening process to reactivate the account, without the need for the parent or guardian's signature.