Minor Demat Account: Features ,Benefits, Limitations, Process

Millennials prioritize family planning, seeking security for their family’s future. They anticipate future expenses early on and adjust their income accordingly. In today’s digital India, with UPI transactions and digital gold purchases on the rise, the stock market offers higher returns compared to traditional savings methods like fixed deposits or gold. A demat account becomes crucial for investing in stocks and securities, especially for parents who aim to build a financial foundation for their children. This demand drives the necessity for investors to open Minor Demat account with stock brokers.

Is it Possible for a Minor to Open a Demat Account?

Under the Indian Contracts Act of 1872, minors are prohibited from engaging in financial agreements. However, a demat account can be opened in a minor’s name solely for the purpose of holding securities under the supervision of a guardian or parent. The guardian or parent must facilitate the transfer of shares to the minor’s account as a gift. It’s important to note that minors cannot be joint holders in a demat account.

Characteristics of Minor Demat accounts

• Limited Control: Minors lack full control over their Demat accounts until they reach adulthood, typically at 18 years old. The parent or guardian manages the account and makes investment decisions on behalf of the minor.
• Joint Holding: Minor Demat accounts are usually jointly held by the minor and the parent or guardian. The adult’s name comes first, indicating their primary account holder status.
• Trading Restrictions: Minors cannot engage in intraday trading, short-selling, or derivatives trading. They are also ineligible for direct equity segment purchases. Funding typically comes from family member gifts, with investments including stocks, mutual funds, and government securities.
• Parental Consent: Transactions on the minor’s Demat account require prior consent from the parent or guardian, ensuring alignment with the family’s financial objectives and risk tolerance.
• Tax Benefits: Earnings through a minor’s investments are considered the income of the parent or guardian, potentially providing tax benefits to them.
• Conversion to Major Account: When the minor turns 18, the account becomes inactive, requiring the opening of a regular Demat account with appropriate documentation. The individual can then invest across various segments with broker approval.
• Transferability: Transferring a minor’s Demat account to another guardian or individual is possible but involves following specific procedures and documentation.

   Advantages of Having a Demat Account for Minors

• Financial Literacy: Opening a Demat account instills the importance of saving and understanding concepts like compounding growth early on, fostering financial literacy. This early exposure helps minors develop better financial planning skills for their future wealth management.
• Saving for the Future: Regular contributions to a Demat account over time can accumulate into a substantial corpus, laying the groundwork for financial independence at a young age.
• Capital Appreciation: Guardians who fund minor accounts often leave investments untouched for years, leading to significant returns through capital appreciation over time.
• Diversification of Investments: Minor Demat accounts allow for diversification across various investment avenues such as equities, mutual funds, government securities, providing minors with exposure to different financial instruments.
  

  Limitations for Opening a Demat Account for Minors

• Minors cannot manage their Demat accounts independently until they turn 18; transactions require a designated guardian.
• SEBI has set limits on the maximum holding value permitted in a minor’s Demat account.
• Certain financial instruments like shorting stocks, intraday trading, and derivatives (F&O) are prohibited in minor’s Demat accounts, with only equities, mutual funds, and approved government securities permitted.
• Minors cannot be joint account holders of a Demat account.

Procedure for Opening a Minor Demat account

Unlike standard accounts, a demat and trading account has no minimum age requirement for minors. However, certain procedures must be followed.

Since the minor is the primary beneficiary, but the guardian operates the account, documentation from both parties is necessary. The required documents include:

1. Proof of Identity (PAN card) for both the parent/guardian and the minor.
2. Proof of Address (Aadhar card) for both the parent/guardian and the minor.
3. The birth certificate of the minor.
4. Bank account details of the guardian/parent.

  Transition of Demat Account Upon Minor’s Adulthood