What is a Minor Demat Account? Meaning, Features & Benefits

If you are familiar with equity investments, then you must also be aware of the benefits of starting the investment journey early. If you want to safeguard your child’s financial future but are unsure about the specifics, then this blog is for you. 

In this blog, we will walk you through the process of opening a Minor Demat account and its features, benefits, and limitations.

What is a Minor Demat Account?

Under the Indian Contracts Act of 1872, minors are generally prohibited from engaging in financial contracts in India. However, according to the Indian Companies Act of 2013, any person of any age may own publicly listed shares. With certain limitations, any minor can own a Demat account under this legislation.

A minor demat account is opened in the name of a minor. However, these accounts require the parents or other legal guardians to take care of the activities, such as transactions and other activities associated with the account, until the minor attains adulthood.

Features of Minor Demat Account

The key features of a Demat account in the name of a minor are as follows-

• Operations – The account is operated by the minor’s parents or legal guardians.
• Documents – The documents of both minors and their guardians are required to open a minor demat account.
• Restrictions– A minor account can only be used to sell securities and activities such as intraday trading, derivative trading, etc are prohibited.
• Taxation – Income generated from investments in a minor demat account is taxed based on the guardian’s tax bracket.
• Conversion – On attaining the age of 18, the minor’s demat account will be converted into the regular Demat Account.

Read Also: Lifetime Free Demat Account (AMC Free)

Eligibility Criteria of Minor Demat Account

The eligibility criteria to open a minor demat account are as follows-

1. Age – The person whose account is to be opened must be a minor or below 18 years of age.

2. Guardian – The guardian is mandatory while opening the demat account in the name of a minor, as the minor cannot operate the account.

3. KYC – Both the minor and the guardian must fulfill the KYC requirement.

4. Bank Details – The minor must have a bank account in their name, and only that account must be linked to the minor demat account.

5. Speculative Trading – SEBI prohibits speculative trading activities in a minor’s demat account.

Documents Required for Minor Demat Account

To open a minor’s demat account, the guardian and the minor must provide several documents. The following is the list of the same:

• PAN Card – This is a mandatory document, and both the minor and guardian must submit it to open a minor demat account.
• Age Proof – Brokers accept various age verification documents, including birth certificates, passports, school leaving certificates, and mark sheets with the date of birth.
• Bank Details – Minor’s bank account details must be provided to link it with the Minor Demat account.
• Passport Size Photo – A passport-size photograph of the minor is also required.
• Address Proof – An address proof, such as an Aadhaar Card, is also required.

Read Also: Documents Required to Open a Demat Account

How to Open a Minor Demat Account?

The minimum age requirement for a regular demat account is eighteen; however, there is no minimum age requirement for a minor demat account. However, there is a process that must be followed:

1. Identify the Broker – The first step is to identify the broker registered with NSDL or CDSL with whom you want to open your demat account.

2. Documents Required for a Minor Demat Account – Gather the necessary documents such as the PAN card of both the minor and guardian, Aadhar cards, the minor’s birth certificate, and bank details. 

3. Fill out the Basic Details: You can register to open a Minor Demat account online and offline. If you use the offline approach, you can fill out the form and submit it to the broker; if you use the online option, you must visit the broker’s website and fill out the form. 

3. KYC – Completing the minor and guardian’s KYC is a crucial step while opening the account.

4. Documents – Attach the scanned copies of necessary documents along with the form.

5. Verification – Once the broker verifies all the documents, they will open a Minor Demat account and provide you with credentials.

Rules of Minor Demat Account

If an individual wants to open a Minor Demat account, then he must follow specific rules and regulations, such as:

1. Guardian Requirement – A minor’s demat account cannot be opened without a guardian. However, a guardian can be a biological parent or a legal guardian appointed by the court.

2. Restrictions – Minors cannot buy or sell securities on their own until they turn 18 years old. 

3. Nomination – A nominee can be registered for a minor demat account by the guardian when the minor demat account is opened.

4. Account Closure – A guardian can close the minor’s demat account and can either sell or transfer the securities.

5. Multiple Demat Account – A minor can only have one demat account under the guardianship of a specific guardian. However, if their parents are separated, both parents can open a separate account for the minor.

Benefits of Minor Demat Account

There are various benefits of having a demat account in the name of a minor, a few of which are mentioned below-

• Financial Planning – You can begin investing early for your kid’s future. With a Minor Demat account, parents can save and invest funds for their child’s future goals more effectively.
• Early Investment – The earlier you start your investment journey, the higher the benefit of compounding will be.
• Tax Benefits – Investing in the name of a minor will provide tax benefits as the gains from such investment are taxed at the guardian’s tax rate until the child reaches the age of 18 years.
• Ownership – Having a demat account provides minors with a sense of ownership and responsibility at a younger age.
• Gifts – Minor can receive shares and other securities from their relatives directly in their Demat accounts.

What Are the Limitations Applicable to A Minor Demat Account?

There are various limitations applicable to a minor demat account; a few of such limitations are as follows-

• No Derivative Trading – Due to the significant risk associated with derivative instruments, SEBI has set restrictions on trading in the derivatives, including futures and options, in the minor’s demat account. 
• No Intraday and Margin Trades – Engaging in intraday trading and margin trading is prohibited in a Minor Demat account. 
• No Independent Execution – The minor cannot execute any trade or transfer any security without the guardian’s authorization.
• No Loans – The holdings in the minor’s demat account are not eligible for loans against the securities.
• Taxation – The income realized on the investments held in a minor’s demat account, such as dividends, interest, and capital gains, are added to the guardian’s income and are taxed based on the guardian’s tax bracket. Minors cannot be independently taxed until they turn 18.

Read Also: What is Client ID in Demat Account?

Conclusion

To sum up, opening a minor demat account will enable you to safeguard your child’s future and effortlessly accomplish financial objectives like marriage and education of your child. Nonetheless, maintaining a minor demat account is subject to several limitations imposed by the SEBI. It is recommended that you open a Minor Demat account in your child’s name to introduce them to the concepts of investments at a young age. 

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