What is Demat Account

If you have ever thought about investing in stocks, mutual funds, or bonds in India, a demat account is where your journey begins. This guide covers everything you need to know about what a demat account is, how it works, what it costs, and how to get started.

What is the Meaning of a Demat Account?

A demat account, short for dematerialised account, is used to hold shares and other securities in electronic form. Instead of keeping physical certificates, your investments are stored digitally, making it easier to hold, buy, sell and transfer securities.

A demat account can hold various types of investments, including shares, bonds, government securities, mutual fund units, ETFs (exchange-traded funds) and more.

In India, a demat account is required to hold and trade most securities in electronic form, making it an essential part of investing in the stock market.

History of Demat Accounts in India

Demat accounts were introduced in India to replace physical share certificates with electronic records, making securities ownership and transfers faster and more secure. The Depositories Act, 1996 provided the legal framework for electronic holding of securities.

NSDL was established in 1996, followed by CDSL in 1999. Today, investors hold their securities electronically through either of these two depositories via a registered Depository Participant (DP).

Features and Benefits of a Demat Account

As an investor, these are the features and benefits of a demat account that you should know about:

• Faster settlements: When you buy stocks today, it is credited to your account following the next business day under India’s T+1 settlement system for most investments like equity shares, ETFs, bonds, REITs, and InvITs.
  
• Every asset, in one place: Every kind of asset that you own, be it stocks, bonds, ETFs, government securities, mutual fund units, or sovereign gold bonds, is consolidated under your demat account. You get to view, access or trade your securities all under one account.
  
• Corporate benefits are credited automatically: When a company declares a dividend, stock splits, issues bonuses and makes a rights offer, the relevant credits or information are automatically updated into your account. No need to track it manually.
  
• Loan against securities: If you have a substantial portfolio and you need short-term liquidity, you may pledge your securities and keep them as collateral, without selling them. The terms, interest rates, loan limits and eligibility criteria vary across lenders and depend on the securities pledged.
  
• Multiple layers of security: While your securities are already secured under the depository system, your account access is protected through multiple layers of security such as Two-factor authentication, OTP-based login, biometric verification on mobile apps, and transaction alerts via SMS or email.
  
• Accessible anywhere: Most depository participants have mobile apps that give you access to your demat account, allowing you to view your portfolio, place orders, and manage your account from anywhere.
  
• Freezing your account: If you suspect unauthorized activity or simply want to ensure no transactions occur on your account for a period of time, you can request a freeze through your DP. A freeze restricts debits, credits, or both, depending on the type you apply, without affecting the value of your holdings in any way.
  
• Secure access: Demat accounts use security measures such as two-factor authentication, OTPs, device-based verification and transaction alerts to help protect your account and securities.

Demat Account Opening Documents

To open a demat account, you generally need your PAN, identity and address proof, bank account details and other KYC information. The exact documents may vary depending on the type of account and the requirements of your Depository Participant.

For a detailed list of documents and the requirements for different investors, read our guide on documents required for a demat account.

How Does a Demat Account Work?

Here is what happens from the moment you make a trade till the moment the securities are credited to your account:

Step 1: You place an order through your trading account to sell or buy a security.

Step 2: The order goes through the stock exchange, either NSE or BSE, where it matches with a seller or buyer at the agreed price.

Step 3: India currently follows the T+1 settlement for most of the trades, which means the settlement of the trade takes place one business day after the trade date.

Step 4: Once the settlement cycle completes, the shares are credited to your demat by your DP.

Types of Demat Accounts in India

Demat accounts are available in different formats depending on the investor's needs:

• Regular Demat Account: Designed for resident Indian investors to hold securities electronically.
• NRI Demat Account: Available to Non-Resident Indians, with two options:
• Repatriable: For example, if an NRI invests in Indian shares through an NRE account and sells them for a profit, the eligible sale proceeds can be transferred outside India, subject to applicable rules.
• Non-Repatriable: For example, if an NRI invests through an NRO account, the sale proceeds generally remain in India, subject to applicable repatriation limits and rules.
• Basic Service Demat Account (BSDA): A lower-cost demat account option for eligible investors with smaller holdings, subject to SEBI's applicable rules.

There are also specialised demat accounts for minors, HUFs, corporates, LLPs and partnerships. These accounts have specific eligibility and operating requirements.

Demat Account Number and DP ID

When you open a demat account, you receive a unique account number that identifies your account in the depository system. The format differs depending on whether your account is with CDSL or NSDL.

For example, a CDSL demat account has a 16-digit numeric account number. The first 8 digits represent the DP ID, while the last 8 digits represent the Client ID. So, if your account number is 1234567887956423, 12345678 is the DP ID and 87956423 is the Client ID.

An NSDL demat account generally starts with “IN” followed by 14 digits. In this format, the “IN” plus the next 6 digits represent the DP ID, while the last 8 digits represent the Client ID. For example, in IN47368696536797, IN473686 is the DP ID and 96536797 is the Client ID.

In simple terms: The DP ID identifies the Depository Participant through whom you hold your demat account, while the Client ID identifies your individual account. Together, they help identify your demat account in the depository system.

Demat Account Charges

Opening a demat account may be free with brokers, but certain charges can apply when you maintain or use the account. Charges may include:

• Annual Maintenance Charges (AMC)
• Transaction or debit charges
• Pledge charges
• Dematerialisation and rematerialisation charges
• Account closure fees and more.

The charges vary depending on the Depository Participant and the services you use. For a detailed breakdown of demat account charges and what each charge means, read our guide on Brokerage Charges

Key Demat Account Terms You Should Know

Dematerialization: The process of converting physical share certificates into electronic form and crediting them to a demat account.

• Depository Participant (DP): A SEBI-registered intermediary, such as a broker, bank or financial institution, through whom investors open and operate demat accounts. The DP acts as a link between the investor and the depository.
• T+1 Settlement: India’s settlement cycle in which trades are settled one business day after the trade date, with the securities credited or debited and funds transferred by the end of the following business day.

Want to understand more demat and investment-related terms? Explore our Glossary for simple explanations of commonly used financial terms.

FAQs

What is a Demat Account?

A Demat account is an account used to hold shares and other securities in electronic form. It allows you to store and manage investments digitally.

What can I hold in a Demat Account?

A Demat account can hold securities such as shares, bonds, ETFs, government securities and other eligible investments in electronic form.

How does a Demat Account work?

When you buy securities, the transaction is processed through your trading account and the stock exchange. After settlement, the securities are credited to your Demat account. When you sell them, the securities are debited from your Demat account.

Who is eligible to open a Demat Account?

Indian residents can generally open a Demat account by completing the required KYC process and providing valid identification and other required details. Minors, NRIs and certain entities can also have Demat accounts subject to applicable rules and requirements.

What documents are required to open a Demat Account?

You generally need a PAN, identity and address proof, bank account details and other KYC information. The exact requirements may vary depending on the account type and Depository Participant.

Is a Demat Account safe?

Yes. Securities held in a Demat account are maintained electronically through India's depository system, which includes NSDL and CDSL. Security measures such as two-factor authentication, OTPs and transaction alerts also help protect your account.

Can I have multiple Demat Accounts?

Yes, you can have multiple Demat accounts, subject to the applicable rules. You can open accounts with different Depository Participants based on your requirements.

What is the difference between a Demat Account and a Trading Account?

A Trading Account is used to place buy and sell orders in the market, while a Demat Account is used to hold your securities electronically. When you invest in shares, both accounts work together: the trading account facilitates the transaction and the Demat account holds the shares after settlement.

Do I need both a Demat Account and a Trading Account to invest in shares?

For buying and selling shares through the stock market, you generally need a Demat account to hold the securities and a trading account to place orders. Many brokers offer both as part of a single account-opening process.

What are the charges for a Demat Account?

Depending on the Depository Participant, you may have to pay charges such as Annual Maintenance Charges (AMC), transaction or debit charges and other applicable fees. For a detailed breakdown, read our guide on Demat Account Charges.

Can I open a Demat Account online?

Yes, many Depository Participants allow investors to open a Demat account online by completing the KYC and verification process digitally.