Prior to 1996, when the first Demat account was introduced to India, traders were burdened with physical copies of their trades which needed to be verified at every juncture. Trading was not only tedious but also occurred at a lower frequency due to the burden of managing securities. Now it is much more seamless. But what is a Demat account and how can it help with trading?
What is a Demat account?
Demat is short for ‘dematerialized.’ Dematerialized means that the securities held in a Demat account are electronic in nature. These electronic securities are not only easy to access but also safely stored in an archive that is digital and password protected. Almost every individual who has dipped their toes in the world of stock market trading has a Demat account, no matter how much they may use it. It is impossible to trade without creating a Demat account.
Individuals who do not reside in India, also known as non-residential Indians or NRIs, also have the option to trade in India by creating a specific type of Demat account. There are different types of Demat accounts although all their functions are essentially the same. Here are the various types of Demat accounts that have made trading the easy and accessible process it is today.
Types of Demat account
Fundamentally, there are three different types of Demat accounts available to traders. Both Indian residents and non-residential Indians have access to trading via specific demat accounts mentioned below. Ensure that you select the type of Demat account that is meant for you, depending on your location and other criteria since each of these Demat account types fit different needs. Your market participation will be a lot more meaningful when you select the right demat account for yourself. These are as follows:
1. Regular Demat account:
This is a Demat account that is recommended to any traders who reside within India. This is the most common Demat account as it is ideal for most individuals who tend to trade in equity shares alone. With a regular demat account, the shares that are bought and sold are stored in electronic form. Keep in mind that if you plan to trade in futures and options, then there isn’t a need to hold a regular Demat account. Futures and options come with a date of expiry and need not be stored in one’s Demat account for the long term.
The Securities and Exchange Board of India has recently introduced a new kind of Demat account known as the Basic Services Demat Account or BSDA. A Basic Services Demat Account is quite similar to a regular demat account. The only difference is that there aren’t any maintenance charges for this kind of account if one’s holdings within this account are ₹50,000 or under. If an investor holds between ₹50,000 and ₹2,00,000 in their BSDA account, a maintenance charge of ₹100 per annum is applied. The idea that launched BSDA was one of financial inclusion so one could aid investors who have yet to participate in markets by choosing one of the types of demat account online.
2. Repatriable Demat account:
Non-resident Indians also have the option to trade Indian securities and this can be done using a repatriable account. It allows traders to transfer funds abroad. One caveat of getting a repatriable demat account is that one requires a non-resident external bank account with these types of Demat accounts. Once you become a non-resident India, you need to close the Demat account that you owned as a residential Indian.
Once your account is closed, you can transfer shares to a specific Demat account known as a non-resident ordinary demat (NRO) account. Suppose you plan on selling your shares. In this case, a repatriation restriction comes into play. As per this restriction on repatriation, you have the allowance to repatriate a maximum amount of $1 million per calendar year, which extends from January to December.
3. Non-Repatriable Demat account
There is a second type of demat account which is recommended for non-resident Indians in particular. This is known as a non-repatriable demat account. In this type of demat account online, one’s funds and wealth cannot be transferred across nationalities. Similar to a repatriable demat account, a non-repatriable demat account requires that one’s funds be associated with a non-resident ordinary bank account.
There are three types of demat accounts available online for Indian residents and non-residents alike. These are regular, repatriable, and non-repatriable types of demat accounts.