Minor Demat Account

What is a Minor Demat Account?

A minor demat account lets a child under 18 hold and invest in securities like stocks, bonds, and mutual funds in electronic form. The account is in the child's name, but a guardian (typically the child's father, mother, or court-appointed guardian) makes all the decisions, purchases investment plans, and does all the transactions until the child turns 18.

Key features of a Minor Demat Account:

The key features of a trading account for minors are mentioned in the following table:

• Account in the Minor’s Name: The Demat account is opened in the child’s name, and all investments legally belong to the minor.
• Operated by a Guardian: A parent or a guardian appointed by the court is in charge of the account until the child turns 18.
• Delivery-Based Investing: Minors can only invest in delivery-based assets like stocks, bonds, mutual funds, ETFs, IPOs, and shares.
• No High-Risk Trading: You can't do intraday trading, futures and options, margin trading, or pledging.
• Automatic Change After 18 Years: When the minor turns 18, the account must be changed into a standard Demat account with new KYC.

Who Can Open and Operate a Minor Demat Account?

SEBI lets a minor open a Demat account; however, there are strict regulations about who can be a guardian and how the account can be used:

• A minor is a child under 18 who has a PAN and KYC documents.
• Guardian who can help:
  • Father is seen as the natural guardian, while Mother is the guardian when Father is not there.
  • If both parents are not there, the court chooses a legal guardian.
• No joint holding is allowed, as a minor can't be a joint owner of any demat account.

What Can You Do with a Minor Demat Account?

Here are the things that brokers with a modest Demat account are allowed to do:

• Receiving and Holding: The minor can get and keep shares through gifts, inheritances, IPO allotments, corporate acts, or off-market transactions (such as family donations).
• Investing (via Guardian): The Guardian can invest in the following investments on behalf of the minor-
  • Mutual funds, SIPs, and Unit Linked Insurance Plans (ULIP).
  • Exchange Traded Funds (ETFs) and bonds, where the broker/ Depository Participant (DP) permits them in minor accounts.
  • Selling existing equity holdings through a trading account opened only for the sale of securities already held in the minor's demat account.

What You Cannot Do in a Minor Demat Account?

The following activities are restricted from a minor's demat account:

• No intraday trading or margin trading is permitted.
• No derivatives (F&O) exposure in the minor’s own trading account.
• No normal buy trades in cash market via a regular trading account in the minor’s name, except to the limited extent and purpose allowed by specific brokers/ SEBI (mainly sale of securities already held).
• Minor cannot sign any trading agreement or operate the account independently.

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Demat Account Rules When a Minor Turns 18

When the minor becomes 18, they must follow these rules for using their trading accounts:

• Mandatory Conversion at 18 Years: The Minor Demat Account must be changed into a standard individual Demat account on the day of the minor's 18th birthday.
• New Individual Account Form: The person who owns the account needs to send the same broker or DP a new form to start an individual account.
• KYC Verification: You need to send in new KYC documents, such as a PAN, Aadhaar, proof of address, evidence of bank account in the adult's name, and photos.
• Adult Video KYC: The person who owns the account must complete IPV or video KYC as an adult and sign the updated rights and responsibilities paperwork.
• Removal of Guardian and Transfer of Holdings: After this is done, the guardian's power is taken away, and all of the holdings are moved to the new Demat and trading account.

Eligibility Criteria to Open a Minor Demat Account

The following conditions must be met to apply for the Minor Demat Account:

• Child is below 18 years of age.
• A guardian is a parent or a court-appointed legal guardian who has valid KYC.
• There can only be one guardian for each Minor Demat Account.

Documents Required

You need to prepare the following documents to open a Minor Demat Account:

• PAN Card of the minor and their legal guardian.
• Aadhar Card of the minor and their legal guardian.
• Proof of the minor's age, like a birth certificate, a school leaving certificate, a passport, or a board mark sheet.
• Proof of the guardian's address, like an Aadhar card, a passport, a utility bill, etc.
• Passport-sized photograph of both the minor and the legal guardian.
• Signature of Guardian
• Court Order (if any)

Steps to Open a Minor Demat Account Online

To open your child's demat account online, you need to do the following:

• Step 1: Find a bank or broker that is registered with SEBI, verify the costs, and make sure your youngster can invest in mutual funds, ETFs, and IPOs.
• Step 2: Click "Open Minor Demat Account" on the broker's website or app. Put in the minor's and the guardian's information, such as their PAN.
• Step 3: You need to upload the papers that are needed to verify your information through e-KYC.
• Step 4: The guardian (and sometimes the child) has to complete a video KYC to prove who they are and that their documents are real.
• Step 5: The Minor Demat Account will be activated within 1 to 3 business days after verification. The guardian gets the credentials so they can start investing.

Benefits of a Minor Demat Account

The following list shows the primary benefits of this account:

• Start investing early: If your child starts investing at the age of 1 to 5, through a SIP or long-term market-linked investment plans, the money will increase for 10 to 15 more years.
• Goal-based planning: Parents can use the minor demat account to save for their children's weddings, schooling, or higher education overseas.
• Financial Literacy: Your child learns about money and markets by looking at their own portfolio over time.

Limitations of a Minor Demat Account:

• Operational dependence: Only the guardian can make investments on their child’s behalf, and transactions could take longer in their absence.
• No guessing: There are limitations on intraday trading and Futures and Options to restrict the return-chasing behaviour in children and also stop aggressive approaches. 
• Conversion paperwork at 18: The need to fill out time-consuming, fresh KYC documents and other procedures to keep their account running.

Charges Levied for a Minor Demat Account

The following charges must be considered before opening a demat account: 

• Many brokers offer zero account opening fees for Minor Demat Accounts.
• Some brokers also provide no Annual Maintenance Charges (AMC), while others may charge a small yearly fee.
• Brokerage is charged normally when permitted transactions take place, such as selling shares or investing in mutual funds.

Tax Regulations for a Minor Demat Account

The tax rules for transactions made through a minor demat account are as follows:

• Indian tax laws provide that if a child makes money from investments like dividends, interest, and capital gains, that money is added to the income of the parent who makes more money.
• The parent with the higher income must report this income and pay the taxes that are due.

Special SEBI Rules on Trading Accounts for Minors

SEBI has clearly laid down the following rules on how trading accounts for minors can be used:

• You can only open a trading account in a minor's name to sell securities that are already in their Demat account, like IPO allotments, gifted shares, or transferred stocks.
• Minors can't trade like adults, thus they can't purchase and sell stocks all the time.
• This rule is in place because people under the age of 18 can't sign legal contracts on their own.
• The Demat and trading accounts can still be used after the minor turns 18, but the now-adult must check the account balances and fill out new forms, much like starting a new account.

Conclusion

A Minor Demat Account is a safe approach for parents to help their child under 18 start making money over time. They focus on compounding through mutual funds, ETFs, IPOs, and other assets without taking on too much risk. Parents may quickly open them online using Aadhaar e-KYC, keep an eye on their child's progress toward goals like going to school, and then easily give them the account when they reach 18.