Table of Contents
Introduction
A Demat Account, short for Dematerialised Account, is an electronic account used to hold and trade securities in India. It is an efficient and secure way to hold shares, bonds, debentures, mutual funds, and other investment instruments in a digital format.
Before the introduction of Demat accounts in India, investors used to hold physical certificates of securities which were cumbersome to store and manage. With the advent of technology, dematerialisation of securities took place, and Demat accounts were introduced to facilitate the buying and selling of shares in a paperless manner.
The purpose of a Demat account is to provide a secure and convenient way to hold and trade securities. With the help of a Demat account, investors can buy and sell securities without any physical paperwork, thus reducing the risk of loss or theft of physical certificates. The transactions are settled in a quick and hassle-free manner, and investors can access their holdings and transaction history online.
Demat accounts have revolutionized the way securities are traded in India, making it easier and more accessible for investors to participate in the stock market. The introduction of Demat accounts has also contributed significantly to the growth and development of the Indian capital market.
History of Demat Accounts in India
The history of Demat accounts in India dates back to the early 1990s. The Securities and Exchange Board of India (SEBI) first introduced the concept of electronic holding of securities in 1996, and the Depository Act was enacted in the same year, which paved the way for the establishment of depositories in India.
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) were the two depositories that were set up to provide electronic trading in securities. Initially, the use of Demat accounts was voluntary, and investors were allowed to hold securities in both physical and electronic forms.
However, with time, the use of Demat accounts became more prevalent, and the Indian stock market saw a shift towards electronic trading. In 1998, SEBI made it mandatory for certain categories of investors, such as institutional investors, to hold their securities in electronic form.
In 1999, SEBI made it compulsory for all investors to hold their shares in Demat form. This move was aimed at reducing the time and cost associated with the settlement of trades, and it also helped to eliminate issues such as forged certificates and fake securities.
Since then, Demat accounts have become an essential part of the Indian stock market, and their usage has increased exponentially. Today, most transactions in the Indian capital market are settled through Demat accounts, making it a crucial component of the Indian securities market infrastructure.
Types of Securities that can be held in a Demat Account
A Demat account is a digital account that holds securities such as shares, bonds, debentures, mutual funds, exchange-traded funds (ETFs), and government securities in electronic form. Here are some of the types of securities that can be held in a Demat account:
- Equity shares: Demat accounts are primarily used to hold equity shares, which are the most commonly traded securities in the Indian stock market. Both listed, as well as unlisted Indian equity shares can be held in the demat account.
- Bonds and Debentures: Corporate and government bonds (including Sovereign Gold Bonds i.e. SGB) and debentures can also be held in a Demat account. Holding these securities in Demat form provides a secure and efficient way to manage them.
- Mutual Funds: Mutual fund units can be held in Demat form, which eliminates the need for physical documents and makes the process of buying and selling mutual funds much more straightforward.
- Exchange-Traded Funds (ETFs): ETFs are securities that track the performance of an underlying index, and they can also be held in a Demat account.
- Government Securities: Government securities such as treasury bills, bonds, and securities issued by the RBI can be held in a Demat account.
- Corporate Actions: Demat accounts also facilitate corporate actions such as bonus shares, rights issues, dividends, and stock splits.
Demat accounts provide a convenient and secure way to hold a variety of securities in electronic form, making it easier for investors to manage their investments and trade in the Indian stock market.
The Process of opening a Demat Account in India
Opening a Demat account in India is a simple process, and anyone who wishes to invest in the stock market can easily do so. Very often, the stock beroker that you open an account with opens a demat account with their partner depository participant viz. either National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL)
Nevertheless, in case you wish to open a demat account (in India) yourself, here’s a brief overview of the process :
Step 1: Choose a Depository Participant (DP) The first step in opening a Demat account is to choose a Depository Participant (DP). A DP is a registered intermediary that acts as an interface between the investor and the depository. Investors can choose a DP based on the services offered and the fees charged.
Step 2: Fill up the Account Opening Form After selecting a DP, the investor must fill up the account opening form, which can be obtained from the DP. The form requires personal information such as name, address, PAN number, and bank account details.
Step 3: Submit Required Documents Along with the account opening form, the investor must submit necessary documents, such as PAN card, Aadhaar card, address proof, and passport size photographs.
Step 4: In-person Verification (IPV) After submitting the account opening form and required documents, the investor must undergo an In-person verification (IPV) process. This can be done by visiting the DP’s office, where the DP will verify the investor’s identity and take a photograph.
Step 5: Activation of the Demat Account After completing the above steps, the DP will process the application and activate the Demat account. Once the account is activated, the investor can start buying and selling securities in the stock market.
In summary, the process of opening a Demat account in India is a simple and straightforward process that can be completed within a few days.
Understanding your Demat Account Number
When you open a Demat Account, you are assigned a unique account number which acts as your identification number in the Depository System. Your Demat Account number is a combination of numbers and alphabets and is usually 16 digits long. It is important to understand your Demat Account number as it is required for all transactions related to your holdings.
The first 8 digits of your Demat Account number represent the DP (Depository Participant) ID. This is the unique identification number of the Depository Participant where you have opened your Demat Account. The next 8 digits represent your unique client ID, which is assigned by the DP at the time of account opening.
It is important to note that your Demat Account number may change if you switch your Depository Participant. In such a case, you will need to update your new Demat Account number with all the companies whose shares you hold in your account.
Your Demat Account number is a confidential piece of information and should not be shared with anyone. Ensure that you keep your Demat Account number and other login credentials safe and secure to avoid any unauthorised access to your account. By understanding your Demat Account number, you can easily track your holdings and carry out transactions in a hassle-free manner.
Documents needed for Account Opening
To open a Demat Account in India, there are certain documents that you need to provide. The list of documents required may vary slightly depending on the broker or depository participant you choose, but in general, you will need the following:
- Identity Proof: This could be your PAN Card, Aadhaar Card, Voter ID Card, Passport, or Driving License. Any one of these documents is sufficient as proof of identity.
- Address Proof: You can provide any one of the following documents as proof of address – Passport, Voter ID Card, Aadhaar Card, Bank Account Statement, Utility Bills, Rent Agreement, or Driving License.
- Passport Size Photograph: You will need to provide a recent passport size photograph of yourself along with the application form.
- Income Proof: Some brokers may ask for your income proof, which could be your salary slip, ITR Acknowledgement, or Form 16.
It is important to note that all the documents you provide must be self-attested, and the original copies of the documents should be carried along for verification purposes. The broker or depository participant may also ask for additional documents or information, so it is best to check with them beforehand. Providing accurate and valid documents is essential for a hassle-free and smooth Demat Account opening process.
Holding Shares in Demat Account v/s Holding Physical Shares: Pros and Cons
In India, the two primary ways of holding shares are in physical form or in dematerialized form (Demat Account). A Demat Account is an account that holds securities such as shares, bonds, and mutual funds in electronic form. On the other hand, holding physical shares means owning the share certificates of the company.
Pros of holding shares in a Demat Account:
- Convenience: Holding shares in a Demat Account is more convenient than holding physical shares as there is no need to worry about handling the physical share certificates or the risk of loss or damage. Demat Account holders can easily buy, sell, or transfer securities with a few clicks on their computers or smartphones.
- Cost-effective: Holding shares in Demat form is generally more cost-effective than holding physical shares. Physical shares involve printing, couriering, and storage costs, which are eliminated when shares are held in Demat form.
- Reduced paperwork: Holding shares in a Demat Account reduces the paperwork involved in handling physical shares. For instance, share certificates require signature verification, which can be a time-consuming process, while Demat shares can be traded electronically with ease.
- Lower risks: Holding shares in a Demat Account reduces the risks associated with holding physical shares. Physical shares can be stolen, lost, or damaged, and their replacement can be a complicated process. Demat shares eliminate these risks, providing a more secure way of holding securities.
Cons of holding shares in a Demat Account:
- Dependence on technology: Holding shares in a Demat Account is entirely dependent on technology. If there is a technical glitch, it can result in the loss of access to the account or even the loss of shares. However, this risk can be mitigated by taking appropriate security measures and maintaining backup records.
- Risk of fraud: Holding shares in a Demat Account can expose investors to the risk of fraud. If the account is not adequately secured, unauthorized transactions or hacking can lead to the loss of shares.
- Additional charges: Demat Account holders are charged fees for account opening, maintenance, and transactions. These charges can be relatively small, but they do add up over time, and investors must be aware of them.
Pros of holding physical shares:
- No dependence on technology: Holding physical shares eliminates the dependence on technology, making it a safer option for investors who are not tech-savvy.
- No additional charges: Holding physical shares does not involve any additional charges other than the cost of handling physical shares.
Cons of holding physical shares:
- Inconvenience: Holding physical shares can be inconvenient as they require physical storage and handling. This can be particularly challenging for investors who own a large number of shares.
- High-risk factor: Holding physical shares can be riskier as they are prone to theft, loss, and damage.
In summary, both holding shares in a Demat Account and holding physical shares have their pros and cons. However, holding shares in a Demat Account is generally more convenient, cost-effective, and secure, making it a preferred option for most investors. Holding physical shares, on the other hand, has its advantages for investors who are not comfortable with technology or who prefer the traditional approach of owning physical assets.
Advantages of Holding Securities in Demat Form
Holding securities in Demat form has become increasingly popular among investors in India due to the numerous advantages it offers over traditional physical securities. Here are some of the key benefits of holding securities in Demat form:
- Safe and Secure: One of the biggest advantages of holding securities in Demat form is that it offers a high level of safety and security. With Demat accounts, investors don’t have to worry about the risk of loss, theft, or damage of physical securities. The shares are held electronically in a secure and centralized system, which eliminates the risk of physical damage or loss.
- Convenient: Another significant advantage of Demat accounts is that they are convenient to manage. Investors can easily track their holdings, monitor stock prices, and make trades online through their Demat account. This eliminates the need to visit a physical broker or transfer physical securities, which can be time-consuming and inconvenient.
- Cost-Effective: Holding securities in Demat form can also be more cost-effective than traditional physical securities. With physical securities, investors have to pay for printing and stamping charges, handling charges, and courier fees, which can add up to significant costs. On the other hand, Demat accounts typically have lower fees and charges associated with them.
- Faster Settlement: Demat accounts also offer faster settlement times, which can be a significant advantage for investors. With physical securities, settlement times can take several days, and the process can be time-consuming and complicated. With Demat accounts, settlement times are typically much faster, as transactions are processed electronically and settled in just a few hours.
- Loans Against Securities: Investors who hold securities in Demat form can also avail of loans against their holdings. This can be a significant advantage for investors who need funds for emergencies or other purposes. Banks and financial institutions are more likely to offer loans against Demat securities, as they are easier to verify and have lower risk.
- No Worries About Corporate Actions: Holding securities in Demat form can also eliminate worries about corporate actions. Investors with physical securities have to worry about keeping track of dividend payments, bonus issues, and other corporate actions. With Demat accounts, these actions are automatically credited to the investor’s account, making it easier to manage and track.
- Better Record Keeping: Finally, holding securities in Demat form offers better record-keeping. With physical securities, investors have to maintain a physical record of their holdings, which can be time-consuming and prone to errors. With Demat accounts, all transactions and holdings are stored electronically, making it easier to manage and track investments.
In summary, holding securities in demat form offers several significant advantages over traditional physical securities. From safety and security to cost-effectiveness and convenience, demat accounts are an excellent option for investors looking to simplify their investments and manage them more efficiently.
Costs associated with demat account
The charges associated with a demat account can be broadly classified into three categories: account opening charges, annual maintenance charges, and transaction charges.
Account Opening Charges:
Most demat account service providers charge a one-time fee for opening a new account. The account opening charges may vary depending on the service provider and the type of account you choose. For example, some service providers may offer a basic account at a lower cost, while others may charge a premium for a premium account with additional features.
Annual Maintenance Charges:
Demat account holders are required to pay an annual maintenance charge (AMC) for the maintenance of their account. The AMC is charged to cover the costs associated with maintaining the account and the securities held in the account. The AMC may vary depending on the service provider and the type of account you hold. Typically, basic accounts have lower AMC, while premium accounts have a higher AMC.
Transaction Charges:
Transaction charges are the fees charged for buying or selling securities through the demat account. These charges are usually a percentage of the transaction value and are subject to a minimum and maximum limit. The transaction charges may vary depending on the service provider, the type of security, and the transaction value.
Additional Charges
In addition to the above charges, some service providers may also levy additional fees for value-added services such as SMS alerts, email statements, online trading, and other value-added services.
It is essential to note that the charges associated with the demat account may vary depending on the service provider and the type of account you hold. Therefore, it is essential to compare the charges and services offered by different service providers before choosing one.
Moreover, investors should also be aware of the tax implications of the charges associated with the demat account. The AMC and transaction charges are subject to Goods and Services Tax (GST) at the rate of 18%. Therefore, it is essential to factor in the GST charges while calculating the overall cost of holding securities in the demat account.
In summary, the charges associated with the demat account are an important aspect to consider while choosing a service provider. The account opening charges, annual maintenance charges, and transaction charges are the primary fees associated with the demat account. It is essential to compare the charges and services offered by different service providers and factor in the GST charges while calculating the overall cost of holding securities in the demat account. By being aware of the charges associated with the demat account, investors can make an informed decision while choosing a service provider and optimize their investment returns.
Tax Implications of transactions in the Demat Account
There are certain tax implications associated with Demat Accounts that investors should be aware of.
- Firstly, the transfer of securities from one Demat Account to another is considered a taxable event. This means that any gains or losses incurred during the transfer will be subject to capital gains tax. If the securities are held for more than one year, they will be subject to long-term capital gains tax, which is currently at 10%. On the other hand, if the securities are held for less than a year, they will be subject to short-term capital gains tax, which is currently at 15%. It is important to note that capital gains tax is only applicable if there is a profit or gain made during the transfer.
- Secondly, dividend income earned from securities held in a Demat Account is also taxable. As per the earlier taxation system, the dividend that was received received from an Indian company was exempt from further taxation, since the company would be paying the Dividend Distribution Tax (DDT) before paying the investor. However, the Finance Act, 2020 changed the taxation of dividends received by the shareholder. With effect from 01st April 2020, any dividend received is taxable in the hands of the investor/shareholder. The Act also imposes a TDS (Tax Deductible at Source) of 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund.
- Thirdly, if an investor sells securities held in a Demat Account and incurs a loss, they can set off the loss against any capital gains made during the same financial year. This is known as capital gains set-off, and it can help investors reduce their overall tax liability. However, if the investor is unable to set off the entire loss amount, they can carry forward the remaining loss for the next eight financial years and set it off against future capital gains.
- Lastly, investors are also required to pay Securities Transaction Tax (STT) on every transaction made through a Demat Account. STT is currently at 0.1% for delivery-based equity transactions (for the buyer and seller). STT is also applicable on the sale of equity-oriented mutual funds, and it is currently at 0.001% for redemption of units. It is important to note that STT paid on transactions is not eligible for any deduction or set-off against capital gains tax.
In conclusion, there are certain tax implications associated with holding securities in a Demat Account in India. Investors must be aware of these tax implications to ensure that they comply with the tax laws and regulations in India. It is recommended that investors consult with a tax advisor or a financial expert to understand the tax implications of holding securities in a Demat Account and to plan their investments accordingly.
FAQs (Frequently Asked Questions) about Demat Accounts in India
Demat Account stands for Dematerialised Account. It is an electronic account that holds securities in electronic form. It is similar to a bank account where you deposit and withdraw money, but in a Demat Account, you hold and trade securities such as shares, bonds, and mutual funds.
Alternatively, think of a demat account like a bank locker for your shares, debentures, and other securities.
Any individual or company can open a Demat Account in India. You can open a Demat Account with a Depository Participant (DP) who is registered with the Depository i.e. either CDSL or NSDL.
The documents required to open a Demat Account are PAN Card, Aadhar Card, address proof, and a passport-sized photograph. The address proof can be any valid document such as a driving license, Voter ID card, electricity bill, or telephone bill.
The charges associated with a Demat Account include account opening charges, annual maintenance charges, transaction charges, and other miscellaneous charges. These charges may vary from one Depository Participant to another.
Yes, you can have more than one Demat Account. However, it is not advisable to have multiple Demat Accounts unless you have a specific reason for doing so.
You can access your Demat Account through your Depository Participant’s website or mobile application. You can view your holdings, check your transaction history, and make transactions using these platforms.
Alternatively, you may also access the holdings in the demat account through your brokerage account.
The advantages of having a Demat Account are numerous. It eliminates the need for physical share certificates, reduces the risk of loss or theft, makes trading faster and more efficient, and provides easy access to your holdings and transaction history.
Yes, you can convert your physical shares to electronic form by opening a Demat Account and submitting a Dematerialisation Request Form (DRF) to your Depository Participant.
In case your Depository Participant goes bankrupt, your securities are safe as they are held in the electronic form with the Depository. You can transfer your holdings to another Depository Participant by following the transfer process.
No, not all securities can be held in a Demat Account. Only securities that are eligible for dematerialisation as per the guidelines of the Securities and Exchange Board of India (SEBI) can be held in a Demat Account. This includes shares, bonds, debentures, and mutual funds.
Yes, you can transfer securities from one Demat Account to another through a process called ‘Off-Market Transfer’. You need to fill up a Delivery Instruction Slip (DIS) and submit it to your Depository Participant.
The time taken to open a Demat Account varies depending on the Depository Participant. However, it usually takes around 5-7 working days to open a Demat Account.
Yes, you can close your Demat Account by submitting a written request to your Depository Participant. However, you need to ensure that all your securities are transferred to another Demat Account or converted to physical form before closing the account.
A Demat transaction is a transaction where securities are transferred from one Demat Account to another. It can be a buy or a sell transaction, or a transfer of securities from one account to another.
No, you cannot buy or sell securities directly from your Demat Account. You need to place an order with a stockbroker or through an online trading platform, and the transaction will be settled in your Demat Account.
A Beneficiary Owner Identification (BOID) is a unique identification number assigned to each Demat Account holder by the Depository. It is used to identify the Demat Account holder in all transactions.
An Electronic Power of Attorney (E-POA) is a digital authorisation that allows a person to act on behalf of the Demat Account holder. It is required for certain transactions such as pledging of securities or opening of a new Demat Account.
Yes, it is mandatory to have a Demat Account to invest in the stock market in India. All transactions in the stock market are settled through the Demat Account, and physical share certificates are no longer issued.
The charges associated with a Demat Account vary depending on the Depository Participant. Some common charges include account opening fees, annual maintenance charges, transaction fees, and charges for additional services like SMS alerts and statements.
Yes, you can hold multiple Demat Accounts with different Depository Participants. However, it is important to keep track of all your securities and ensure that you do not hold duplicate securities in different accounts.
If your Demat Account becomes inactive due to non-usage, your Depository Participant may charge an account reactivation fee. It is important to keep your account active and transact regularly to avoid these charges.
A Demat Request Form (DRF) is used to transfer physical shares into a Demat Account. The DRF needs to be filled and submitted to the Depository Participant along with the physical share certificates.
A Corporate Action is an event initiated by a company that affects its securities. Examples of Corporate Actions include stock splits, bonus issues, and rights issues. Demat Account holders are notified of these events and are required to take appropriate action as per their holding.
Yes, you can pledge your securities held in a Demat Account as collateral for loans or other transactions. However, you need to provide an Electronic Power of Attorney (E-POA) to authorise the pledge.
Conclusion
In conclusion, Demat Accounts have transformed the Indian stock market and made it more accessible and secure for investors. They offer numerous benefits such as convenience, security, ease of trading, and better liquidity. However, they also come with certain drawbacks such as high costs and cyber threats. Therefore, investors must weigh the pros and cons of Demat Accounts and make an informed decision based on their investment goals, risk appetite, and financial situation.
Overall, Demat Accounts are an essential tool for investing in the Indian stock market. They provide a reliable and efficient way of holding and trading securities.