What is a Demat Account?
As the name suggests, "Demat", means dematerialization. In simple terms, Demat means the digitization of a physical copy. A Demat account, as mandated by the Securities and Exchange Board of India (SEBI), is key to investing in the securities market. It allows you to store shares digitally or electronically and prevents any physical loss of shares in your holdings. Before the concept of Demat was introduced, investors would have a physical copy of contracts, for the shares bought and sold. Demat account eliminated the need for such documents and made it simple and secure for investors to track and store their investments. A Demat helps you store, shares, ETFs, mutual funds, bonds, debentures, etc., in one place and can help track all transactions in a single view.
What is a Dormant Demat Account?
A dormant demat account is one that has not been actively used for an extended period. If you haven't executed any transactions in your demat account for 12 months, it may be classified as dormant by your broker. Dormant accounts can still hold securities, but it is advisable to take action if you no longer need the account.
Why Should You Close Dormant Demat Accounts?
A dormant Demat account is one that does not have any investments in them. Just like a person may have more than one bank account they may also have more than one Demat account. However, the key aspect of a Demat account is that it involves maintenance charges that are levied by the Depository Participant (DP). Such charges are known as Annual Maintenance Charges or AMC. To avoid paying such charges, it is wise to close dormant Demat accounts. While opening a Demat account, these charges are mentioned in advance. If your Demat account has not been used for a year, it will be marked as inactive, and you will have to reach out to your broker to activate the account once again.
Another significant reason to close dormant Demat account is to avoid them from being used for any fraudulent activity. Before you get surprised, you should know that inactive Demat accounts are a hunting ground for fraudsters and scammers. To avoid any mishap, it is recommended to close dormant Demat accounts that have zero balance and holdings in them.
Types of Demat Account Closures
Demat account closure can be further categorized into two parts depending on the current state of holdings in the account:
- Full Closure: If your Demat account is completely dormant, and you do not have any holdings or pending charges to be cleared, you can raise a request with your DP (which can be your stockbroker) to close the Demat account.
- Transfer and Closure: If your dormant Demat account has some holdings, in the form of shares or any other form of securities, then you are first required to transfer these holdings into a different Demat account, clear all the pending charges, and then raise a request for the closure of the Demat account.
How to Deactivate Demat Account: Do's and Don'ts
To close a Demat account, the process is usually available online. However, there may be some brokers who would want you to complete an offline procedure, like submitting a closure form. Closing a dormant Demat account would require you to fill in some necessary details. Also, it is wise to download the closure form for any future reference or use. Before you close a Demat account, it is important to check some prerequisites.
- Check if there are any holdings in your Demat account like mutual funds, shares, bonds, etc.,
- The account balance should not be negative during the closure
- You should not have any open trades or positions in the market
- It is recommended to download a copy of your account closure form and read the terms and conditions
How to Deactivate Your Demat Account?
Deactivating your Demat account requires certain basic procedures, that may vary from broker to broker. It usually involves filling up an account closure form that asks you to fill in your personal details, the reason for closure, providing KYC documents, etc. If your Demat account is a joint Demat account, then it would also ask for the details of the other member. You may have to submit a client master report, depending on the stockbroker’s requirement.
Steps to Close a Demat Account
Closing a demat account is a straightforward process that depends on the type of account and its status—whether it has holdings or is empty. It requires submitting a closure form, clearing dues, and settling or transferring any securities. The steps vary slightly for joint holders, minors, and Hindu Undivided Family (HUF) accounts based on ownership and documentation.
Here are the steps to close your demat account online:
- Download the Closure Form: Visit your broker’s website and download the demat account closure form.
- Fill in the Necessary Details: Enter the required details, including your account number and the reason for closure.
- Ensure Zero Holdings: Transfer or sell off all your holdings and make sure no securities remain in the account.
- Submit the Form: Submit the closure form along with your KYC documents and proof of identity.
- Receive Confirmation: Once your request is processed, you will receive a confirmation email or letter indicating that your account has been successfully closed.
Details Required for Closing a Demat Account
The details required for closing a Demat account are mentioned below:
- Your Demat account number, and DP ID.
- KYC proofs like PAN card.
- Reason for the closure of the account.
- Submission of the account closure form to the DP’s head office
The Process to Close a Demat Account in Case of Account Closure
You need to follow the below-mentioned steps:
- First and foremost, you would require an account closure form. You may download from the DP’s (Depository Participant’s) website
- Now fill in the form and submit it along with your KYC (Know Your Customer) documents. This is inclusive of address and identity proof. Submit the form & documents.
Account closure for joint holders, minors, and HUF account holders
Joint holders with no holdings
Submit a signed closure form with KYC documents of all joint holders. Ensure no outstanding dues exist. Closure is processed once the form is verified.
Joint holders with holdings
Transfer existing securities to another demat account or sell them. Submit a closure request form signed by all holders along with the delivery instruction slip (DIS) for transferring holdings.
HUF with no holdings
Submit the closure form on HUF letterhead signed by the Karta, PAN of the HUF, and a declaration confirming zero holdings.
HUF with holdings
Transfer all holdings to another account in the HUF's name or sell them. Provide a DIS, PAN, and closure request form with the Karta’s signature.
Minors with no holdings
Submit closure request signed by the guardian. Include the minor’s PAN and birth certificate along with the guardian’s KYC documents.
Minors with holdings
Sell or transfer holdings first. The guardian must sign the DIS and closure form, submitting all supporting documents including PAN and birth certificate.
Why demat accounts are closed and their consequences
Demat accounts are usually closed when they are no longer needed or to avoid maintenance charges. If not closed properly, charges may continue, and future trading may get affected.
(i) Common reasons for demat account closure
- Account inactive for years and incurring charges
- Duplicate or multiple demat accounts
- Change in investment strategy or switching to physical form
- Investor no longer interested in equity markets
- Joint holder or HUF restructuring ownership
- Transition to a consolidated family account
(ii) Key points to keep in mind before closing
- Ensure all holdings are sold or transferred
- Clear pending dues or AMC fees
- Submit DIS if transferring holdings
- Use correct closure form for individual, joint, HUF, or minor
- Collect acknowledgement from the DP after form submission
- Account cannot be reopened once closed
Conclusion
Closing a Demat account that is dormant or inactive, is important to avoid paying any unnecessary annual maintenance charges. It also prevents you from any fraudulent activity and keeps you in control of your investments in the securities market.