Embarking on the journey of financial education for your child is a commendable step, and opening a minor trading account in India can play a pivotal role in fostering a sense of financial responsibility. In this guide, we will delve into the intricacies of the process, exploring the steps and considerations involved in setting up a minor’s trading account. From understanding the eligibility criteria to navigating regulatory requirements, this comprehensive walkthrough aims to empower parents and guardians with the knowledge needed to initiate their child’s introduction to the world of investments.
Table of Contents
Defining a Minor
In India, a minor is legally defined as an individual below the age of 18 years.
- Minors do not have the legal capacity to enter into contracts, including financial transactions. However, when it comes to trading in India, there are provisions that allow minors to have a share in investments through a guardian or a natural/legal guardian-operated minor’s trading account.
- Minors themselves cannot directly trade or own a trading account, but a parent or legal guardian can open a minor’s trading account on their behalf.
- The guardian manages and operates the account until the minor reaches the age of majority.
- This setup enables parents or guardians to introduce their children to the basics of investing and financial planning, fostering financial literacy from an early age.
Need for a Minor Trading Account
Opening a trading account as a parent can provide you with numerous advantages.
Planning Child’s Future
Opening a trading account as a parent offers several benefits, especially in planning for your child’s future. Parents often face various expenses, with education being a significant concern. In addition to educational costs, unexpected expenses such as medical bills may arise at any point in their lives.
Goal-Oriented Investing
The account provides an excellent platform for parents to plan and invest in specific goals in their child’s life, such as education or other significant milestones. This goal-oriented approach helps in creating a structured and purposeful investment strategy.
Segregation of Funds
One of the key advantages is the clear segregation of funds. Parents can invest specifically for their child(ren) without the risk of using those funds for personal benefits. This ensures that the earmarked funds remain dedicated to the child’s financial goals.
Teaching Financial Responsibility
A minor trading account exemplifies goal-oriented investing, teaching minors about assets, liabilities, and stocks. This hands-on experience enhances their financial literacy and decision-making abilities, preparing them for future financial responsibilities.
Stepping Stone for Financial Education
The account serves as a stepping stone for minors to learn about the world of finance. It introduces them to the concepts of investing, allowing them to understand the dynamics of assets and liabilities, fostering a foundation for making informed financial decisions in the future.
Opening a Minor Trading Account
The process of opening trading accounts for minors in India is very simple. Compared to a normal Demat account the number of documents required to open a minor trading account are:
- PAN (Permanent Account Number) card of the minor
- PAN card of the guardian
- Birth certificate of a minor
- Identity proof, preferably an Aadhaar card linked to the PAN card of the minor
- Address proof of the minor’s identity
Along with this both the guardian and the minor would have to go through the KYC (Know Your Customer) process, which could be done online via eKYC or offline.
Trading Account Changes When Minor Turns 18
Close the Minor Account
Once a minor crosses the age of 18, there are two options with the minor trading account.
In this process, you choose to close your current trading and Demat accounts and open a completely new trading account. Once the account opening process is done, holdings from the minor account are transferred to the major trading account and the Demat account can be closed.
Convert the Minor Account
In this process. your current minor account isn’t closed or deleted. There is a small procedure and certain documents that you’d have to fill out for your minor account to be converted to a major Demat account. The guardian details are removed, and the now 18+ adult gets complete control of the account.
Restrictions on a Minor Trading Account
A minor Demat account has certain restrictions when compared to a regular Demat account. Here there are a few restrictions that a minor account has.
- It can not be a joint account.
- The minor will not be able to operate the account until they are 18 years of age. The legal guardian is liable to operate the account until then.
- Only equity can be bought and sold through this account.
Here is an accurate list of segments in which a minor’s account cannot be traded.
- Equity intraday
- Equity futures
- Equity options
- Currency derivative trading
A minor’s account should generally be used for investment or gifting purposes and not for trading. Minor accounts are not taxed, which is both an advantage and a disadvantage. Instead, the gains from them are included in the income of the legal guardian.
Protocols for Minor Trading Account in the Event of Guardian’s Demise
The death of a guardian is a very unfortunate incident. This could lead to complications with the minor account. Here are the steps you would have to follow to open a trading account for minors in India.
- Submit the original or a copy of the death certificate of the guardian.
- Get the document notarised properly or have it attested by a gazetted officer.
- The death certificate can be downloaded from the online Government portal carrying a digital/facsimile signature to the depository participant (DP).
- Once the downloaded certificate is submitted it will be verified by the DP with the respective registrar.
- Upon verification, the minor’s account will be frozen until the new guardian completes the next steps.
- The new guardian must provide all the necessary details along with the KYC (Know Your Customer) form.
- If the new guardian is appointed by the court, the original or copy of the court order must be submitted along with the KYC form.
- The copy of the court order must be notarised or attested by a gazetted officer.
- Once the guardian is approved by the DP, ensure to collect a copy of the Rights and Obligations document.
- A new nomination form must be filled out and submitted by the new guardian for the minor’s account.
- Upon the completion of the whole process and approval, the new guardian details must be updated with the depository.
- The signature of the deceased guardian must be replaced by a new guardian for them to access the account.
Conclusion
Opening a minor trading account in India is a strategic and empowering step for parents and guardians looking to impart financial education and plan for their child’s future. This guide has highlighted the essential steps and considerations involved in the process, from understanding eligibility criteria to navigating regulatory requirements. By initiating a minor’s introduction to the world of investments, this endeavour not only lays the foundation for financial literacy but also provides a practical means to instil responsible financial habits. The minor trading account stands as a powerful tool for goal-oriented investing, teaching valuable lessons about assets, liabilities, and stocks, ultimately preparing the younger generation for a financially informed future.
