What Is a Demat Account?

What Is a Demat Account and Why Do You Need One?

A demat account — short for dematerialised account—is an account that allows you to hold company shares and securities electronically. You can hold dematerialised securities such as stocks, mutual funds, bonds, exchange-traded funds (ETFs), etc., in a demat account. So, when you place an order to buy a stock, the shares get credited to your demat account. Similarly, when you choose to sell your shares, they get debited from your account.

A demat account is akin to a bank account. The only difference is that while a bank account has money, a demat account holds securities, including stocks, mutual funds, exchange-traded funds (ETFs), etc.

The Securities and Exchange Board of India (SEBI) introduced demat accounts in 1996 as an alternative to holding physical certificates. Revolutionising stock market investments, the number of demat accounts rose by 46 million in 2024 and has more than quadrupled in the last five years from 2019. You can open a demat account with a registered stockbroker by providing basic documents related to your identity, address, and income.

You can choose to open either a demat account or a 3-in-1 account, which links your trading and bank accounts. This enables you to trade without the need to move physical share certificates. Not only is it a storehouse for your investments, but it also speeds up transactions and reduces costs.

History of Demat Accounts in India

Securities in India were initially traded in physical form. Investors held paper share certificates, which led to issues such as bad deliveries, loss or theft of certificates, delays in transfer and extensive paperwork. These issues contributed to inefficiencies and increased risk of fraud and ownership disputes.

The process of dematerialising share certificates began after economic liberalisation in 1991. The Indian government, along with SEBI, sought to modernise and secure the securities market. SEBI was established in 1992 as the market regulator, and it soon initiated reforms to introduce digital trading and dematerialisation.

In 1996, the Indian Parliament passed the Depositories Act, which provided the legal foundation for dematerialisation. This led to the establishment of the National Securities Depository Limited (NSDL) in the same year. Being India's first electronic securities depository with nationwide coverage, NSDL enabled the conversion of physical securities into electronic form and facilitated seamless, paperless trading.

In 1999, Central Depository Services India Limited (CDSL) was established as the second depository, mainly promoted by the Bombay Stock Exchange (BSE) and supported by major nationalised banks. Both NSDL and CDSL now maintain demat accounts in India, with depository participants (DPs) such as banks acting as intermediaries between investors and them.

Features of a Demat Account

The demat account offers the following features.

• Easy share transfer: All you have to do is move your shares and give your depository participant a signed Delivery Instruction Slip (DIS). Collateral for loans: You may use your assets in a demat account as collateral if you want a loan from a financial institution.

• Temporary freeze: You can put your demat account on temporary hold for a certain amount of time. But usually, you can only use this option if you have some shares in your account.

• Corporate action benefits: Benefits like dividends, bonus shares, stock splits, interest, and refunds may be transferred quickly with the best demat accounts.

• Speed e-facility: With NSDL, you can electronically transmit instruction slips to your depository participant.

• Convenient asset holding: Holding physical certificates is risky and time consuming. By digitising the certificates and opening a demat account, you may retain them more easily and securely.

• Multiple access points: Demat accounts are entirely digital. So, they may be accessed by any digital device, including smartphones, PCs, and other smart devices, from any location.

What Are the Benefits of a Demat Account?

One of the biggest benefits of a demat account for investors like you is that it is digital. Having said that, there are many other advantages of demat accounts that can be listed as follows.

• Security of shares: The most crucial benefit of a demat account is that it is safer than holding physical shares, which can get lost, damaged, or stolen.

• No forgery or theft: Since the demat account is electronic in nature, the risk of documents getting stolen, damaged, or lost does not exist.

• Efficient trading and settlement: Demat accounts streamline the process of buying and selling securities by enabling electronic trading and seamless settlement. They eliminate paperwork and physical delivery. This reduces transaction time, making trading more efficient.

• Lower cost: Physical share certificates attract paperwork and stamp duty, which increases costs. With a demat account, all this is eradicated, and you can get a demat account in no time.

• Multiple access points: A demat account is operated electronically, which essentially means that users can access the account from multiple touchpoints—mobile, tablet, PC, laptop, etc.

• Easy and secure holding: With a demat account, you can hold your securities in electronic form, eliminating the need for physical share certificates. This makes it convenient to hold financial assets.

• Online access and monitoring: Demat accounts can be accessed online, allowing you to monitor your holdings, track portfolio performance, view transaction history, and generate statements. It provides real-time information and easy tracking of investments.

• Quick and convenient transfers: Transferring securities from one demat account to another is hassle-free, ensuring smooth ownership transfers. It simplifies estate planning, gifting, and transferring securities to heirs.

• Loan and margin facilities: Demat accounts allow you to pledge your securities as collateral for loans or margin trading. Demat accounts provide opportunities to access funds against securities without liquidating the holdings.

Overall, demat accounts enhance the efficiency, convenience, and security of holding and transacting securities in the modern digital era. Here’s another benefit of a demat account—one that you can get only with Kotak Securities.

Your trades become more seamless with a 3-in-1 account, as it links your bank and trading accounts with the demat account!

Demat Account Details

Now that you know the definition of a demat account, let’s understand its details. This account has your key information, i.e., details of the account holder, including your name, address, PAN, and contact information (mobile number and email ID).

That’s not all. The account also records all your buy and sell transactions, including settlement dates and security details. This gives you a complete overview of all your transactions at one glance. This can help you make informed decisions and calculate your tax liability accordingly.

Your demat account also includes nominee information, ensuring a smooth transfer of assets if needed. The account is linked to a depository (NSDL or CDSL) through a depository participant (DP). This ensures seamless transactions and secure storage of your investments. With everything managed digitally, a demat account can help you track your portfolio, monitor market trends, and make timely investment decisions.

You can verify these details from the demat account statement, which you can access through your broker’s platform.

How Does a Demat Account Work?

There are many benefits to having a demat account. However, it’s crucial to understand how it works so you can make the most of it. A demat account functions as a digital repository for holding and trading securities like shares, bonds, ETFs, mutual funds, and more in electronic form. It allows investors like you to convert physical certificates into electronic form, facilitating seamless transactions and eliminating the need for paper-based processes. Through integration with trading and bank accounts, as an investor, you can easily and securely access and execute your trades, receive dividends, and monitor your portfolio in real time. All demat account transactions are processed via NSDL and CSDL, which ensures transparency and regulatory oversight.

Types of Demat account

There are primarily two types of demat accounts:

• Regular Demat Account: This type of demat account is suitable for individual investors who want to hold and transact securities for personal investments. It is typically opened by retail investors and provides access to a wide range of securities, including stocks, bonds, mutual funds, and government securities.

• Basic Services Demat Account (BSDA): This type is designed for investors who have smaller portfolios. It generally offers reduced or zero annual charges if holdings are below a particular threshold.

• Repatriable (NRI) Demat Account: This type of demat account is designed for Non-Resident Indians (NRIs) who wish to invest in the Indian securities market. It allows NRIs to hold and manage their investments in India, including stocks, mutual funds, and other permissible securities. Repatriable demat accounts facilitate the easy repatriation of funds back to the NRI's foreign bank account.

• Non-Repatriable Demat Account: Also designed for NRIs, this account offers all the convenience of the above type except for facilitating the transfer of funds abroad.

The choice of demat account type depends on the investor's residency status and investment objectives. Other specialised types of demat accounts may also be available to cater to specific investor categories, such as corporate entities, institutional investors, or foreign portfolio investors (FPIs).

Documents Required for Demat Account Opening

The documents required for demat account opening are an account opening form, identity and address proofs, and a passport-sized photograph.

• Proof of identity (Aadhaar Card/Passport/Driver’s License)
  

• Proof of address (Ration card/Passport / Rent Agreement / Recent Electricity or Telephone Bills)
  

• Income proof (Income Tax Return/Salary Slip)
  

• PAN Card
  

• Photographs

You’ll get the full list of documents accepted for account opening here.

How to Open a Demat Account?

Opening a demat account can be very simple and requires minimal paperwork. Here’s how you can open a demat account:

Step 1: Fill the account opening form

Step 2: Submit documents

Step 3: Finish the in-person verification (IPV)

Step 4: Get an account number/ID

You could also opt for a digital demat account where the entire application process is online. The steps are similar: Fill in the application form, upload scanned copies of your documents, and complete the IPV. The only difference is that it all happens through digital channels!

Demat Account Number and DP ID

Now you know the meaning of a demat account, let’s understand two essential things, the demat account number and the DP ID. Your demat account number and DP ID are unique identifiers for your account. They are crucial for conducting transactions, tracking investments, and ensuring secure operations in the stock market.

Your demat account number is a 16-digit number that you get upon opening a demat and trading account with a stockbroker. This number varies across the two central depositories - NSDL and CDSL. If NSDL is your depository, your demat account number starts with IN, followed by a 14-digit numeric code. On the other hand, if CDSL is your depository, your demat account number is a 16-digit numeric ID.

DP ID is different from your demat account number. It’s a unique 8-digit code assigned to every depository participant or stockbroker by central depositories, NSDL, or CDSL. The first eight digits of your demat account number constitute the DP ID.

Demat Account vs Trading Account

While a demat account is essential to investing in markets, you also need a trading account. Although both accounts share similarities, such as the required documents for opening them, they differ significantly in other aspects.

The table captures the key differences between a demat account and a trading account on various aspects that can help you understand them better.

For convenience, you can open a demat account and a trading account from the same broker.

Charges and Fees Associated with Demat Accounts

Demat accounts have several associated charges and fees, and these can vary depending on the broker and the type of account you opt for. A few common charges are:

• Account opening charges: Many brokers offer free account opening, but some may charge a one-time fee.

• Annual maintenance charges: This is a recurring fee for keeping your demat account active. This fee can vary depending on the broker you choose and the type of investor you are (retail or corporate).

• Brokerage charges: These are the fees for executing trades through the broker. Depending on brokers' policies, this can either be a flat fee or a percentage of the transaction value.

• Depository Participant charges: This fee is charged by the DP for holding securities, often applied per transaction or per ISIN (International Securities Identification Number).

• Off-market transaction charges: These are fees for transferring securities between demat accounts outside the exchange platform. They are usually a percentage of the transaction value or a fixed fee, whichever is higher.

• Other miscellaneous charges: Charges for physical or non-periodic statements, failed transactions, and additional services like nomination or DIS booklets, to name a few, fall under miscellaneous fees.

Things to Remember While Opening a Demat Account

When opening a demat account, there are a few important points to keep in mind:

1. Choose a reliable Depository Participant (DP): Select a reputable DP, such as a well-established bank or trusted brokerage firm, to ensure the safety and reliability of your demat account.

2. Understand the fees: Familiarise yourself with the account opening charges, annual maintenance fees, transaction fees, and other charges associated with the demat account. Compare these charges among different providers to make an informed decision.

3. Check the services and offerings: Assess the range of services provided by the DP, such as online access, customer support, research reports, and additional features. Ensure that the DP meets your requirements and provides the necessary tools and resources for managing your investments effectively.

4. Review the terms and conditions: Carefully read and understand the terms and conditions, rights, and obligations associated with the demat account. Pay attention to clauses related to account closure, account freezing, or any restrictions that may affect your investment activities.

5. Complete documentation: Ensure that you provide accurate and complete documentation required for opening the demat account. This typically includes identity proof, address proof, PAN card, and other relevant documents as specified by the DP.

6. Keep account credentials secure: Once you receive your demat account details and login credentials, safeguard them securely. Treat the account credentials with the same level of security as your banking login details to protect your investments. By keeping these factors in mind, you can make an informed decision while opening a demat account and ensure a smooth and secure experience managing your securities electronically.

If you're no longer using your demat account or wish to switch providers, ensure you follow the proper closure process.