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In India, any investors who want to own securities like stocks, bonds and mutual funds must open a demat account. Demat is short for dematerialised—demat accounts are electronic records tracking your ownership of tradable assets.
Demat accounts debuted in 1996, and over the intervening two decades they have greatly expanded the availability of securities ownership to a much wider range of investors in India. Let’s take a closer look at why you need a demat account to invest in India and how you can open one.
Why Do You Need a Demat Account?
A demat account serves as a storehouse of information for all of the securities transactions you make in India. When you buy and sell exchange traded funds (ETFs), stocks, bonds and mutual funds, the change in ownership is recorded in your demat account.
The Securities and Exchange Board of India (SEBI) requires everyone who wants to trade Indian securities to have a demat account. That means demat accounts are absolutely mandatory, and a person without a demat account is not allowed to conduct securities trading in India under any circumstances.
But demat accounts aren’t all about regulatory compliance. They offer useful features and other advantages, and provide you with a permanent record of all your securities trading transactions.
- You get a safe wallet. Demat accounts serve as safe wallets to store securities electronically. Investors don’t need to worry about misplacing physical certificates, theft or fraudulent exchanges of their stock and bond holdings. Demat accounts also eliminate the possibility of potential fake signatures on physical certificates.
- Execute trades instantly. With a demat account, securities transactions are processed instantly. They enable investors to convert their physical share certificates into digital form and also convert their online securities into physical documents seamlessly.
- No extra stamp duty charges. Investors can trade in any kind of securities in any volume they’d prefer. A demat account does not involve additional paperwork cost and stamp duty charge on transfer of shares, which were the case with physical certificates. These have allowed investors to freely trade without the worry of limiting their securities’ numbers to accommodate costing.
- Get updated market information. Once you have a demat account, you get access to useful market information such as live price charts and investment comparison tools. This gives you the information on investments you need to trade.
- No minimum balance fees or minimum trading requirements. A demat account don’t have any minimum balance requirements or execute a minimum number of trades. This eases the pressure on dormant investors or long-term investors who wish to carry out a trade occasionally. Investors can also freeze the demat account for certain periods of time to limit the credit or debit flow of the account.
A demat account is not just a tool for investing, it’s a gateway to financial freedom and wealth creation.
Buvanesh
Guide On How To Open Demat Account
Demat accounts can be opened at a central depository such as the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL).
The way a depository institution interacts with an investor is via depository participants (DPs). These DPs could be any financial institution or entity registered with the depository institution to act as an intermediary between the depository and the investor.
Investors can open demat accounts with DPs without worrying about security of their investments as the DPs are appointed by the central depositories only after grant of Certificate of Registration by SEBI.
Follow these three steps to open a demat account:
Identify Your DP
Investors can choose which financial entity they may like to open their demat account with. In India, NSDL or CDSL websites list DPs registered with the depository. You can also check with an independent entity of your choice if they are registered for a demat account.
To ensure your DP selection is ideal, you can compare the annual charges levied by the DPs for their services, which include maintenance charges.
Open An Account
Your DP will provide you with an account opening form. To fill it out, you’ll need:
- A PAN card, which serves as proof of your identity.
- An Aadhaar card or your other government-authorised identity card such as drivers’ license or voter’s ID, which serves as proof of your address.
- Copy of a cancelled bank cheque or bank passbook to provide your bank account number and your name.
- Income tax returns document or last six months’ salary slips, which serves as proof of your income.
- Passport-size photographs for in-person verification. In cases of joint accounts, both account holders need to be present for the verification process.
Investors are allowed to have more than one demat account, but not with the same DPs.
- Trading Accounts: If you want to purchase and sell shares in the stock market, you will need to open a trading or a broking account with any SEBI-registered stockbroker along with your demat account.
Trading accounts can be opened via your DPs depending on their offering. Trading accounts are additional accounts that are needed for trade in equities along with a demat account. In the absence of a demat account, a trading account cannot be used.
To put it simply, demat accounts help you store information on your securities’ transactions, whereas a trading account enables you to actually carry out the buy and sell of shares. Similar to multiple demat accounts permitted, multiple trading accounts per investor are allowed.
Verify Documents
Once your demat account is opened, you will receive a set of identification documents.
- Your DP identification code. This is an 8-digit code allotted by the central depositories to all DPs
- Demat account number. This 16-digit code is a unique combination of your DP ID and client ID, an 8-digit code used by DPs to identify clients in the system.
- Copy of your Client Master Report. This will contain your demat account details and should be carefully checked for correct details submitted with your DPs.
- Login ID & password. A unique login ID and password will be given at the time of opening an account for for online access
- Power of attorney document. This document allows a broker to operate their client’s demat account. It acts like an authorization letter without which a broker cannot conduct trading for the client.
Once your demat account is open, you can begin the purchase, sale and storage of shares, can apply for initial public offerings of companies, receive corporate benefits like dividends in your demat account, hold mutual funds and bonds including government securities in your account and treat it like your identity in the Indian stock market.
How Does NRI Demat Account Work
Unfortunately, non-resident Indians can’t open regular demat accounts.
They need to open either a repatriable demat account, which is linked to a NRE (non-resident external) account that enables money to be transferred abroad, or a non-repatriable demat account, which is linked to a NRO (non-resident ordinary) account that does not allow transfer of money abroad.
NRI investors are mandated to appoint another person as power of attorney to conduct transactions on their behalf.
How Much Do Demat Accounts Cost: Demat Account Opening Charges & Fees
Before you open a demat account, you need to understand the costs involved. DPs charge service and maintenance to demat account holders.
NSDL or CDSL charge their DPs management fees, and the DPs in turn charge investors. DPs are charged at a uniform rate by the central bodies, and they are free to arrange their own fee structures.
There are five kinds of charges associated with a Basic Services Demat Account, which has a holding limit of up to INR 2,000,000.
Demat Account Opening Charges
To open a demat account, investors used to commonly pay a one-time charge of up to INR 1000 until a few years ago. Today, a majority of demat accounts have zero account opening charges, although some account providers still charge an opening fee.
To encourage investors to engage in different kinds of accounts such as savings and deposit accounts, brokerage houses and banks club multiple kinds of accounts to offer combo accounts that allow investors to open demat accounts for free.
Demat Account Custodian Fees
Custodian fees were very common when securities were stored in a physical form. Demat accounts free you from the need to store physical securities, however some DPs still charge a nominal custodian fee.
The charges depend on the number of securities that are held in a demat account. These charges range between INR 0.5 to INR 1 for each International Securities Identification Number, which is a 12-digit unique code that identifies securities.
Demat Account Annual Maintenance Charges
DPs charge annual maintenance fees. These charges are often levied based on the number of transactions.
For example, Kotak Securities, the securities division of Kotak Mahindra Bank, charges investors based on the number of transactions done:
- INR 65 per month for up to 10 debit transactions
- INR 50 per month for 11 to 30 debit transactions
- INR 35 per month for more than 30 debit transactions
- Non-resident Indians pay INR 75 per month
Annual maintenance charges widely vary. Some DPs charge investors a flat INR 300-500 per year, while others waive first-year annual maintenance charges to win customers and start charging in year two.
In addition, investors must pay the Central Government’s Goods and Services Tax (GST) monthly, quarterly or annually, depending on their DPs rules. GST is separate from any DP annual maintenance charges.
Demat Account Transaction Charges
Transaction charges are fees charged per transaction. They can be a flat fee or a percentage per transaction. Transaction charges vary from one DP to another.
Investors should be aware what they pay per trade ahead of conducting trading activity. These transaction charges could range anywhere between INR 1.5 to INR 20 depending on the volume of trades carried out.
Dematerialization and Rematerialization Charges
Dematerialization is when physical share certificates are converted into digital records and rematerialization is converting electronic records into physical certificates. Both processes carry fees.
Besides these charges, nominal charges are levied for courier/postal charges or re-issuance of delivery instruction booklet (DIB) among other charges and investors must clearly understand. These charges have to be paid in advance to avoid unexpected surprises.
