Zerodha minor demat account

Zerodha minor demat account is a demat account held in the name of a person below 18 years of age and operated exclusively by a natural or legal guardian, offered by Zerodha as a depository participant registered with CDSL and NSDL. The account is governed by the Depositories Act, 1996 and the SEBI (Depositories and Participants) Regulations, 2018. A minor demat account is a demat-only account; a separate trading account cannot be opened in a minor’s name under current SEBI guidelines, which means the account may hold securities but cannot independently place market orders.

Eligibility and who can open

A minor demat account may be opened for any Indian resident who is below 18 years of age. The account must be operated by:

• A natural guardian, the father, or in the father’s absence or incapacity, the mother, as defined under the Hindu Minority and Guardianship Act, 1956 (for Hindu, Buddhist, Jain, and Sikh minors) or the Guardians and Wards Act, 1890 (for other faiths).
• A legal guardian, a person appointed as guardian by a court of competent jurisdiction.

A testamentary guardian named in the will of a deceased parent may also act, subject to documentary verification.

Non-resident Indian parents cannot open a minor demat account for a minor who is an Indian resident through the minor demat account route; the applicable pathway in such cases depends on the residency status of the minor and guardian.

Documentation required

Documents for the minor

PAN is not mandatory for a minor demat account where holdings are purely for investment purposes and do not generate taxable income above the basic exemption limit. However, if the minor’s income (including income deemed as the guardian’s income under section 64(1A) of the Income Tax Act, 1961) is to be assessed, PAN registration for the minor is advisable.

Documents for the guardian

KYC process

The KYC for a minor demat account is conducted in the name of both the minor and the guardian. The guardian completes the eKYC using their own Aadhaar OTP and PAN. The minor’s KYC is separately recorded using the minor’s birth certificate and, if available, PAN.

Zerodha’s online account-opening portal does not currently support the minor demat account opening workflow end-to-end; as of 2024, the minor demat account form must be downloaded, completed, and submitted as a physical application to Zerodha’s registered office in Bengaluru along with notarised or self-attested copies of documents.

In-person verification (IPV) is conducted for the guardian, not the minor. The guardian’s identity and relationship to the minor are verified at this stage.

Segments and operational restrictions

A minor demat account at Zerodha is subject to the following restrictions:

• No trading account, SEBI guidelines do not permit a trading account in the name of a minor. Securities can be received through IPO allotments, off-market transfers (gift or transmission), or bonus/rights credits, but the minor cannot actively trade equities or derivatives on exchanges in their own name.
• No F&O, intraday, or currency/commodity trading, These segments require an active trading account and are unavailable.
• IPO applications, Applications under the Initial Public Offering process may be submitted by the guardian on behalf of the minor through the ASBA mechanism, using the linked bank account. UPI ASBA is not available for minor accounts.
• Mutual fund investments, Direct mutual fund units can be credited to a minor demat account. SIP mandates are executed through the guardian’s bank account via NACH.
• Dividend and income, Dividends paid on securities held in a minor’s demat account are credited to the guardian’s linked bank account and are clubbed with the guardian’s income for tax purposes under section 64(1A) of the Income Tax Act, 1961.

Tax treatment

Income arising from assets held in the name of a minor (other than income earned by the minor through their own manual work, or income from an activity involving the minor’s skill, talent, or specialised knowledge) is clubbed with the income of the parent (the guardian) whose income is higher, under section 64(1A) of the Income Tax Act, 1961. A deduction of INR 1,500 per minor per financial year is available under section 10(32) before clubbing.

Capital gains on securities held in the minor’s demat account and sold on the minor’s behalf are similarly clubbed with the guardian’s income.

Securities that can be held in a minor demat account

A minor’s demat account can hold any security that is eligible for dematerialisation:

• Listed equity shares, Received through IPO allotments, bonus issues, rights issue credits, or off-market transfers from family members.
• Mutual fund units in demat form, Direct plan mutual fund units allotted through AMC or platform investments.
• Government securities, Sovereign bonds, state development loans, T-bills allotted through auctions or the RBI Retail Direct platform.
• ETFs, Exchange-Traded Fund units allotted through NFOs or purchased in the secondary market by the guardian using the minor’s account in a limited capacity.
• Unlisted equity, Shares in private companies received as inheritance, transmission, or gift.

IPO allotments in a minor’s name

The guardian may apply for an Initial Public Offering allotment in the minor’s name using the ASBA mechanism. The UPI ASBA channel requires the applicant to hold a UPI-linked savings bank account; because a minor typically does not hold a personal savings account, UPI ASBA is impractical for most minor accounts. Bank-based ASBA using the guardian’s linked savings account (operated under the minor’s application) is the standard mechanism.

On allotment, shares are credited to the minor’s demat account. The guardian must have coordinated with the bank to ensure the ASBA block is applied to a savings account that can be linked to the minor’s application through the PAN of the minor.

Tax impact on guardian’s income

Clubbing under section 64(1A)

Section 64(1A) of the Income Tax Act, 1961 is a comprehensive clubbing provision covering income arising from assets in the name of a minor child (with exceptions for income from manual work or specialised skill). The clubbing applies as follows:

• Income is clubbed with the income of the parent whose total income (excluding the minor’s income) is higher in the relevant financial year.
• If the parents are separated, income is clubbed with the parent who maintains the minor.
• If one parent is dead, income is clubbed with the surviving parent.
• The parent in whose income the minor’s income is clubbed is entitled to a deduction of INR 1,500 per minor per year under section 10(32).

For capital gains: the minor’s STCG and LTCG on securities held in the demat account are clubbed with the higher-income parent’s total income. The capital gains are taxed at the higher-income parent’s applicable rate (20 per cent for STCG on listed equity, 12.5 per cent for LTCG above INR 1.25 lakh).

PAN requirement and TDS

If the minor’s demat account receives dividends, the company deducts TDS on the higher-income parent’s PAN (linked to the account) at 10 per cent under section 194. The parent reports the dividend in their personal ITR.

For IPO allotments where shares are sold later by the guardian, the capital gains are reported in the parent’s ITR under the clubbing provisions, using the minor’s acquisition cost as the cost of acquisition.

Conversion to adult account upon attaining majority

When the minor turns 18, the account status changes automatically in the depository records. At this point:

1. All operations are suspended, The guardian’s authority to operate the account ceases on the minor’s 18th birthday.
2. Fresh KYC is mandatory, The newly adult account holder must complete fresh KYC in their own capacity, including Aadhaar OTP verification, PAN, and bank account linking.
3. Trading account opening, The individual may now open a full resident individual account with a trading account, which can be linked to the converted demat account.
4. Account re-activation, Upon completion of fresh KYC and Zerodha’s internal processing, the account is re-activated in the individual’s name.

SEBI’s master circular on KYC requires depositories and depository participants to flag minor accounts for mandatory review at the time the minor attains majority.

Operational considerations

Nomination

SEBI mandates that minor demat accounts must have a registered nominee. The guardian nominates a person (typically a parent or other family member) on behalf of the minor. Nomination is updated at the time of majority conversion if the adult account holder wishes to change it.

Transmission upon death of guardian

If the guardian dies before the minor attains majority, the surviving natural guardian (typically the mother if the father was the operating guardian) or a court-appointed legal guardian may apply to Zerodha for a change of guardian. The process requires a fresh KYC for the new guardian and submission of appropriate legal documents (death certificate, succession documents, or court order).

Securities received as gift

Securities may be transferred to a minor’s demat account as an off-market gift from a family member. The transfer is executed via CDSL or NSDL’s off-market transfer mechanism (delivery instruction slip or online authorisation). For amounts exceeding INR 50,000 in a financial year, such gifts from non-relatives may attract tax under section 56(2)(x) of the Income Tax Act, 1961.

References

1. SEBI (Depositories and Participants) Regulations, 2018.
2. Depositories Act, 1996.
3. Hindu Minority and Guardianship Act, 1956.
4. Guardians and Wards Act, 1890.
5. Income Tax Act, 1961, sections 10(32), 56(2)(x), 64(1A).
6. SEBI Master Circular on Know Your Customer (KYC) norms for the securities market, SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/37, dated 8 March 2023.
7. SEBI circular on nomination in demat accounts, SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2021/672, dated 16 November 2021.