A Demat Account is an account that allows investors to hold their shares in an electronic format. Stocks in a Demat account remain in their dematerialized form, where dematerialization is the process of converting physical stocks or shares into an electronic format. The function of a Demat account is very similar to the purpose of banks, in that, whereas a bank holds money, a Demat account holds Shares, Government Securities, Mutual Funds, Bonds, and Exchange Traded Funds (ETFs) and other similar securities. Prior to 1996, physical share certificates on paper were utilized to determine the ownership of shares traded. India adopted the Demat Account system for electronic storing in 1996, which introduced the process of shares and securities being represented and maintained electronically.
Thereby successfully eliminating the involvement of paper shares and physical share certificates. It is mandatory to own a Demat account to trade on Indian stock markets. Before an investor can open a Demat account, they need to hire a DP or Depository Participant, who can be a broker or any financial institution like a bank. The DP will act as an intermediary between the investor and the national depositories of NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). The DP will fill-in and submit any and all of the documentations and forms required, and after payments for the sum charged for opening a Demat account has been cleared, the investor is free to trade through their new account.
What are the Demat Account Charges?
Opening charges are levied on Demat accounts however, they are quite nominal. Financial institutions such as banks, have begun to offer “zero” Demat accounts wherein the account opening charges will be zero. Certain banks have also begun to offer “zero balance” Demat accounts, where similar to a zero balance bank account, an investor is allowed to open a Demat account with no initial investment. The way banks benefit from this scheme is that, for an investor to open a Demat account with the bank, they will also have to open a general account with the bank as well. This allows the bank to take charge of the account holder’s trading account float which greatly profits and compensates for waiving the account opening charges. Recently, brokers have also begun to waive off account opening charges, or in some cases they significantly reduce the charges.
Apart from Demat account charges for opening, there are a number of charges that are associated with a Demat account. There are two kinds of Demat accounts, each having a different set of charges associated with them. First, there is the Basic Service Account where the AMC or Annual Maintenance Charges (a significant fee charged for the maintenance of one’s Demat account) are not applicable until the valuation of the accounts holdings reaches the amount of Rs. 50,000. This was made keeping in mind the requirements of smaller investors. A Full Service Account is a more suited option for regular investors. Here the AMC is charged annually and the amounts charged range from Rs. 300 to a maximum of Rs. 800 per year. There is a GST rate of 18 percent that is applicable on these charges and generally, the AMC rates vary on the basis of the number of transactions that have been made through an account. If the number of transactions are higher, the AMC charged is less and vice versa. In certain cases, banks often offer to waive the AMC for the first year and begin to charge from the next year onwards. However, there are also instances of hidden charges that financial institutions like banks can levy to compensate for waiving off some of the initial charges. For instance, banks have been known to charge a hefty AMC from investors who do not have a general bank account with the bank but have only opened Demat accounts through them.
The AMC is charged annually but, there are a few other charges that are made on a monthly basis. The custodian fee is one such instance. The custodian fee is charged based on the holding in an account, the number of securities in an account determines the rate. Generally, the DP charges around Rs.0.50 to Rs.1.00 for every ISIN every month. If a company or investor has paid the one-time charges made by the Depositories directly, they no longer have to pay custodian charges. Since it is convenient and hence more common for investors to pay the direct charges, most DPs do not charge the custodian fees.
Another one of the monthly charges is the transaction fees, which is also charged by the DP every moth on the basis of the number of time securities have been debited and/or credited to an account. The rate of the charges levied is different for every DP, they can either charge a flat fee per transaction, or they could deduct on the basis of percentage depending on the valuation of the transaction. The transaction fees also depends on the kind of transactions being made. For instance, in certain cases the DP does not charge for the transaction if it is credit transaction where securities are credited to the account. The DP only charges in case of debit transactions.
Apart from the AMC, custodian and transactions fees, there are a few other miscellaneous charges that deducted. The DP can charge the account holder if any instruction has been failed to comply or rejected. Generally a DP will insist that the account holder use the online facility provided by the DP, if however the account holder insists on having the account statements physical delivered to them, the DP is free to charge separately for that. Charges such as credit tax, service tax, Swach Bharat and Krishi Kalyan are also levied on the account.
Despite the number of charges that have to be incurred, there have been situations when account holders are charged additionally, being unaware of the fact that they may not have to pay for them. For instance, investors are often unaware of the distinction in the fees charged for the Basic Service and Full Service Accounts. Account holders have often been paying the charges for a Full Service Account while running a Basic Service Account. It is therefore important for investors to be aware of the fees that are charged and the rates they should be ideally paying.