Minor Demat Account – Everything You Need to Know

Want to introduce your child to investing early? A minor demat account is a great way to help them learn about stocks and financial markets from a young age. However, you might have questions like how to open a minor demat account or who is eligible for one. If you're looking for clear answers, you’re in the right place. This guide covers everything you need to know about opening a minor demat account online. But first, let’s understand who qualifies as a minor in India.

Who is a Minor?

A minor in India is an individual who has not yet crossed 18 years of age, as per the Indian Contracts Act of 1872. The conditions that define minor include:

• These are individuals who cannot sign or participate in financial agreements.

• They do not have the decision-making power for their finances.

• They can make investments but under the guardianship of parents or any other party as appointed by the court of law. 

Once you reach 18 years, the minor demat account should be converted to a major. Now, minors have attained the legal age and can make financial decisions independently. They have the signing authority as well. 

Now that you know who a minor is, let us understand the minor demat account here.

What is a Minor Demat Account?

A minor demat account is a unique investment account developed for individuals under the age of 18. This account allows minors to hold and manage securities such as stocks, bonds, and mutual funds under the supervision of a parent or legal guardian.

However, minors cannot enter contracts with stock brokers to buy or sell securities. The account's purpose is restricted to selling existing securities, and no new purchases can be made directly by the minor. The securities can only be transferred from the parent's or guardian's account.

Features of Minor Demat Account

The key features of the minor demat account are as follows:

1. Guardian Supervision

All activities in a minor's demat account must be supervised and managed by a parent or legal guardian until the minor reaches the age of majority (18 years).

2. Ownership and Control

While the securities are held in the minor's name, the account's control remains with the guardian. It can be the parents or any legal guardians appointed by the law.

3. Conversion to Major Account

Upon reaching the age of 18, the minor demat account must be converted into a regular demat account, and the young adult must complete all necessary KYC (Know Your Customer) formalities.

4. Investment Options

The account can hold various securities. Starting from stocks, bonds, mutual funds, and ETFs to government securities, a minor can make investments by transferring the shares from a guardian's account. Here, Transfer of shares as gifts in this account is also permitted.

5. Restrictions on Account Operation

Brokerage firms often have restrictions on intraday trading, speculative transactions, and derivative trading to prevent risky trading activities.

6. Documentation

The opening of a minor demat account requires specific documentation, including identity and address proof of the guardian, as well as the birth certificate of the minor.

7. Tax Implications

Income generated from investments held in a minor demat account may be clubbed with the income of the parent or guardian for tax purposes, depending on the source of the investment funds.

Now, let us understand how can a minor open a demat account with ease. 

How to Open a Minor Demat Account?

The minor demat account age limit ends at 18 years. Once you reach this age, you must open a regular demat account to continue investing in the stock market. If you're a minor looking to open a minor demat account, you need to follow this step-by-step process for minor demat account opening online or offline.

Step 1: Choose a Reputable Stockbroker: 

Select a stockbroker registered with NSDL or CDSL that offers minor demat accounts.

Step 2: Gather Required Documents

• PAN Cards: For both the minor and the guardian.

• Identity Proofs: Aadhar cards or other valid IDs for both parties.

• Birth Certificate: To verify the minor's age.

• Bank Account Details: Information for the guardian’s bank account.

Step 3: Fill Out the Application Form:

• Online: Visit the stockbroker’s website, locate the demat account section, and fill in the online application form.

• Offline: Visit the nearest branch, request the account opening form, and complete it (the guardian must sign on behalf of the minor).

Step 4: Submit KYC Details and Documents

• Online: Upload clear and legible scanned copies of all required documents as part of the digital KYC process.

• Offline: Hand over the completed form and all required documents (originals or attested copies) to the branch staff for verification.

Step 5: Verification Process

• The stockbroker will review and verify your submitted details and documents. This step is common to both online and offline methods.

Step 6: Account Activation

• Once your documents are verified and the KYC process is complete, you will receive a confirmation (either via email or in person) that the minor demat account is active and ready for use.

By following these combined steps, you can open a minor demat account either online or offline using the same basic process tailored to each method.

Documents Required for Minor Demat Account

While you plan to open a minor demat account, you must know various documents that are required to complete the process. The following table shares all the documents required for a minor demat account:

Benefits of Opening a Minor Demat Account

When you open a minor demat account, you allow your kids to explore the financial world better. This is just one of the many benefits of a minor demat account. The other benefits that you gain when you open this are as follows:

1. Knowledge of Financial Planning

When you open a minor demat account, you educate your child on proper financial planning. It helps them to understand the importance of savings in their lives. At the same time, the funds invested in the minor’s name can be easily saved to meet long-term educational or marriage goals. 

2. Early Guidance on Investments

Through a demat account, you can build a habit of proper planning and investing. You can teach this to your kids from a very young age. Also, you can guide them on various investing options available in the market. This way, you can properly compare the options and guide them.

3. Tax Benefit

It also helps to save tax in India as Investments made through a minor demat account are taxed at the guardian's income tax rate. This reduces the tax implications for the guardian. Additionally, there is a Rs 1,500 exemption limit on the minor's income under Section 10(32) of the Income Tax Act. 

4. Wealth Generation

Gathering a considerable amount of funds to meet long-term goals is not an easy task. But when you have a minor demat account, you can easily use it as a place where you can accumulate wealth, which can be used as needed. Also, you can easily use this account for generating returns and savings while using your regular account for expenses. 

5. Diversification

With a minor demat account, minors can invest in various securities, which helps diversify their investment portfolio. Diversification is crucial as it spreads risk across different asset classes, potentially reducing the impact of poor performance in any single investment.

6. Legacy Building

Educating minors about investing and involving them in financial decisions establishes a financial legacy. It teaches them the value of wealth creation and asset management, principles they are likely to carry into adulthood and pass on to future generations.

7. Empowerment and Awareness

By participating in financial activities, minors become more empowered and aware of their financial environment. They gain the confidence to make informed decisions and understand the responsibilities associated with managing money. This early exposure can be crucial in developing a strong, independent financial mindset.

Restrictions on a Minor Demat Account

Till now, you have checked the benefits of a minor demat account. You have also checked the comprehensive list of documents required for the demat account. But do you know certain restrictions are associated with the minor demat account? 

So, here are a few limitations associated with the minor demat account:

1. Operational Dependency

The minor demat account cannot be opened by a minor alone. So, there is a high dependency on the guardians. Additionally, all the transactions can be performed by the guardian only. So, even though the account is in the name of a minor, the operational rights stay with the guardian. 

2. Restriction in Certain Trades

In minor demat accounts, only equity delivery trades can be performed. You cannot deal with intraday, derivatives, futures, and options. So, ensure that you plan it thoroughly before you plan to open a minor demat account. 

3. Trading Account Linking

When it comes to trading accounts, a minor demat account cannot be linked to it. This means minors cannot directly buy or sell securities through online trading platforms.

These restrictions ensure that minors are protected from high-risk trading activities while allowing them to learn about investing under the supervision of a guardian.

Comparison Between Minor and Regular Demat Accounts

You now know the details of the minor demat account. But have you ever wondered if there is any difference between the regular and minor demat accounts? Well, if you closely evaluate these accounts, you will find some minor differences between the two. 

Check the table below for details:

Minor Demat Account Rules

Operating a minor demat account requires you to understand some of its rules and regulations. So, here are the common minor demat account rules that you must be aware of:

• A minor demat account must be opened and operated by a parent or legal guardian.

• Only equity delivery trades are allowed; minors cannot engage in intraday trading, derivatives, futures, or options.

• A minor demat account cannot be linked to a trading account for direct trading.

• KYC documentation should be submitted for both the minor and the guardian.

• The guardian retains full account control until the minor turns 18 years old.

• This account should be either closed or converted to a regular account upon reaching adulthood.

Tax on Minor Demat Account

When you invest in stocks, knowing the tax implications is important. The same is the reason why you must know the details of tax on minor demat accounts. The basic information of taxation that a demat holder should know are:

1. Clubbing of Income

Any income earned by the minor, including capital gains and dividends, will be added to the parent's income with a higher income. This is known as "clubbing of income" under Section 64(1A) of the Income Tax Act.

2. Tax Exemption

Parents can claim an exemption of up to Rs 1,500 per child on clubbed income if they file under the old tax regime.

3. Post-18 Transition

Once the minor turns 18, future investment income will be taxed in their name, not clubbed with the parent's income.

These tax implications encourage parents to manage their children's investments while ensuring compliance with tax regulations.

Investment Options Available for Minors Using Demat

Multiple options are available for minors to invest in. Few are fixed return options, while others are linked to the market. So, first, let us look at the options a minor can invest in using the Demat account.

1. Equities

Minors can invest in shares of listed companies through a minor demat account. This will also help them understand the market and company valuations. Also, This will help them build capital for the future.

2. Mutual Funds

Investing in mutual funds is one of the best decisions to make if looking for long-term returns. Additionally, investing in mutual funds through a demat account lets you keep track of all details simultaneously.

3. Exchange-traded funds (ETFs)

ETFs are traded funds that are similar to mutual funds. These funds usually follow an index, making it easier to track their performance. As compared to stocks, these are stable and can help in understanding how trading works as well.

4. Digital Gold

Minors can invest in digital gold through platforms that facilitate this service. Digital gold allows investors to buy gold online, which is stored securely by the provider, making it a convenient and flexible investment option.

5. Initial Public Offerings (IPOs)

Minors can apply for shares in an IPO if they have a Demat account opened in their name. The parent or guardian must fill out the application on behalf of the minor, enabling early participation in the stock market.

What to Do When a Minor Becomes a Major?

Once the minor becomes a major, the minor demat account must be converted to the regular demat account. Now, for this, you would need to submit a request with your bank or broker to convert the account. Proper KYC documents should back the request.

The documents that are needed for the process include:

• KYC of a minor who is now a major. It includes PAN, Aadhar, and any other necessary documents.

• The bank information and signature are to be updated in the account.

• Application form to complete the transfer process.

After submitting all these, the account will get converted to a regular demat account. The account is now operated individually. Now, you act as an investor, performing trades, making investments, and making crucial financial decisions - a key to gaining financial freedom.

Conclusion

Opening a minor demat account serves various purposes. It allows the guardians or parents to teach minors about savings and investments. Also, it allows you to keep funds aside for the minor’s future. It provides a platform for minors to explore various investment options, such as equities and mutual funds, while fostering financial literacy from a young age. 

Understanding these accounts' rules, documentation requirements, and tax implications is crucial for effective management. A minor demat account can be a valuable tool for wealth generation and financial empowerment with the right approach.

So, if you have a minor at home, it's time to open the demat accounts. Get ready to help them learn the market minutes early and build a better financial future.

FAQs

Q1. Can a minor open a Demat account?

Yes, a minor can open a demat account provided that it will be managed and operated by the parents or the legal guardians as appointed by the court of law. 

Q2. Can a minor invest in the stock market?

Minors cannot enter contracts with brokers, so they can't directly buy or sell securities. Their account can only transfer or sell existing holdings, with any new purchases made through a guardian's account.

Q3. Can a minor invest in SIPs?

Yes, minors can invest in SIPs. The minor, under the supervision of a guardian or parents, can directly invest in SIP or through the demat account.

Q4. Can we apply for an IPO from a minor's Demat account?

Yes, you can apply for IPO using their minor demat account. Here, the parent or guardian must submit the application on behalf of the minor.

Q4. Who operates the Demat account of a minor?

Guardians or parents operate the minor demat accounts on the minor’s behalf. Once a minor becomes a major, which is at the age of 18, he/she can operate the account on own.