A Demat account stores securities in electronic format and is extremely useful when it comes to trading in the Indian stock market. Without a Demat account, one can not trade in equity. The inception of the depository was revolutionary as it changed the trading landscape. Initially, in the stock market, physical shares were traded. Trading was a tedious process, with the investor or their representative having to be present at the stock market. The settlement period was lengthy, and the risk of losing the certificate or its being damaged during delivery was always a concern. The Internet with the Demat account led to a trading boom as trading became easier and more convenient to carry out. The ease of trading and reduction in the settlement period was a boon to traders.
As a trader, a Demat account is mandatory to trade in the Indian stock market. There are multiple prerequisites to be fulfilled for opening a Demat account. It is better to start understanding who can open a Demat account to get a clear idea of all the prerequisites.
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Eligibility Criteria to Open a Demat Account
There are a few criteria that must be fulfilled to open a Demat account. The criteria are:
- The individual must be 18 years of age.
- A PAN card is a compulsion.
In India, individuals or a group of individuals can open an account.
Resident individual
A resident individual is an Indian citizen who resides in India. To qualify as an Indian citizen, an individual must spend at least 182 days in India in a given tax year or must be physically present in India for at least 60 days in relevant tax years, along with at least 365 days in total in the preceding tax years. A resident individual can open a Demat account with the proper documents.
Hindu Undivided Family (HUF)
The HUF is considered a separate assessable entity. The Hindu Undivided Family is treated as a person under section 2(31) of the Income Tax Act of 1961. An HUF is automatically created in a Hindu family, and Jains and Sikhs are also treated as HUF. The HUF is a family with all persons lineally descended from a common investor, including wives and unmarried daughters. A Demat account for HUF is opened in the name of either the oldest family member or the Karta (manager of the family), who is the signatory authority for all trading and Demat account transactions unless otherwise specified.
Domestic Corporation
A domestic corporation is an enterprise that conducts all business inside of India. It is also eligible to own a Demat account.
Non-Resident Indians (NRIs)
NRIs are citizens of India who do not reside in India. It’s a common misconception that Non-Resident Indians can not trade in India, but any Indian citizen can freely trade in the Indian stock market. However, there are additional requirements an NRI must fulfil to trade in the Indian stock market, which can be easily fulfilled. A separate Demat account must be opened, and the depository participant must be informed during the account opening process. No special permission is needed from the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI), which regulates all transactions and trading.
Individuals of Indian origin who are not residing in India can open a repatriable Demat account or a non-repatriable Demat account for trading. A person of Indian origin is a citizen of any other country apart from Bangladesh and Pakistan who possessed an Indian passport or is the offspring of a parent or grandparent, or a spouse of someone who has held an Indian passport at some point in the past. Such an individual is eligible as an NRI who can open a Demat account in india.
Clearing Member (Pool Account)
This account is opened and maintained by brokers. It’s an account that the brokers make use of to trade for their clients. The clients’ shares are held in this account. This account is also where the broker receives shares from the central depositories.
Benefits of a Demat Account
A Demat account provides multiple benefits. These are:
- Storage of all securities is convenient and extremely secure.
- Trading and transfer of shares happen electronically through a hassle-free process.
- This smooth transfer of shares leads to a lower settlement period, increasing liquidity and making it a good investment option.
- Malpractices like the forgery of shares are eradicated.
- Trending fees have been reduced compared to the physical trading of shares.
- Corporate actions like dividends, share splits, bonus shares, etc. are deposited easily without any issues.
- Changes to your personal details and the addition of nominees occur effortlessly.
- It’s easy to get loans against your own shares through pledging services.
- Investors can freeze their account or a specific share and unfreeze it when they wish to sell them.
Conclusion
Trading in the stock market is extremely advantageous and can benefit traders drastically. Understanding who can open a Demat account can help you understand what type of Demat account is suitable for you. An individual can trade in the Indian stock market as long as they are an Indian citizen or are of Indian origin.
