Downsides of multiple demat accounts
A demat account is your gateway to the world of investments. Today, opening a demat account is fairly simple and straightforward. You can open a demat account online. If you open a demat account with blinkX (JM Financial), there are no demat account opening charges, so you can open a demat account actually free of cost. That makes your transacting in the capital markets a lot cheaper.
However, while understanding the various demat account benefits, one question that does arise is whether an investor can have multiple demat accounts. This is quite common among large investors and this is something people must be aware of. There is nothing stopping you from opening multiple demat accounts. While it has some advantages, it also has some disadvantages you must be conscious about.
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What you must know about multiple demat accounts?
As the name suggests, multiple demat accounts means having more than one demat account. The demat account is a repository of your shares and other securities like bonds, gold bonds, ETFs, mutual funds etc. Here is what you need to know about multiple demat accounts.
- It is perfectly legitimate to have multiple demat accounts. There is no rule that stops an investor from having two or even more demat accounts in his or her name to hold their investments in custody.
- However, current regulations do not permit you to have multiple demat accounts with the same depository participant or broker. In case you want to have more than one demat accounts, then you must open these with different depository participants or DPs as they are better known.
- What about joint accounts? Can the same person have an individual demat account and a joint demat account with the same DP? That is possible as long as the individual demat account holder is not the first holder. You can be an individual demat account holder and also be the second holder in a joint demat account with the same DP.
- However the concept of multiple demat accounts does not apply to Basic Services Demat Account (BSDA). Current regulations allow you to have only one BSDA across all the brokers against your PAN in India.
Why do people prefer multiple demat accounts?
The million dollar question is whether multiple demat accounts really add value? They can add value in certain circumstances.
- There are a number of demat account holders who are traders and investors. For instance, there are investors who would prefer to hold their trading stocks in one demat account and their investment long term stocks in another demat account for the sake of simplicity. This allows them to use one demat as a margin demat account also.
- Several people trade in their own individual account and also in the name of the individual proprietorship concerns. For tax purposes, you may want to segregate these two accounts for the sake of simplicity. In such cases again, there may be a justification for having multiple demat accounts.
- A common reason for multiple demat accounts is in the case of investors who want to bequeath certain shares to their children. To enable easy transmission to their children or family members, they may either have a joint account with them or appoint them as nominee for the demat account.
- Finally, investors often want to segregate the shares bought by them from the shares they got as a gift or which they inherited by way of transmission. In such cases also, the multiple demat account is quite common.
Disadvantages of having multiple demat account?
While multiple demat accounts do offer some advantages, they also come with some costs and additional hassles. That is something you need to be cautious about.
First and foremost is the cost aspect. Remember a demat account has a cost. For instance, DPs may not charge you for account opening, but there is an annual maintenance costs or AMC that is billed to account holders on an annual basis. This is based on the each demat account and the DP bills them to you on annual basis. The demat AMC charges may vary from Rs600 per year to Rs1,000 per year or higher depending on the value of your assets under custody. If you have 4 or 5 demat accounts, then the cost can add up to quite a bit and you would end up paying a steep cost just to maintain multiple demat accounts.
Second is the administrative hassles. When you have multiple demat accounts, there are multiple communications that you need to track. You need to track the valuations in each of these demat accounts and also check the corporate action execution in all these demat accounts. In addition, if you have 5 demat accounts and you need to execute a change of address or bank mandate, then you need to write to each of these DPs and that becomes as cumbersome as the old days when you have to write individually to the registrar of every company that you held as an investor. If you have multiple shares spread across demat accounts, then you need to track AGM dates, voting at the AGM, attending AGM and unless all this communication is consolidated, you may have a real practical problem on hand.
There is the risk of your account going defunct if there is no activity in the demat account for a continuous period. Normally, in such cases, as per SEBI regulations, the DP will freeze your account. Of course, you don’t lose any of the shares held by you but before transacting in that demat account you need to unfreeze these shares. Also, keeping a demat account idle is never safe as it opens up your demat account to a variety of frauds that we have seen instances of in the past.
Tax filing becomes more cumbersome with multiple demat accounts since you need to consolidated the profits or losses of all demat accounts before deciding on the write off and carry forwards of losses against profits. That only makes the job tougher.
So what is the middle point. Firstly, if you want to have multiple demat accounts, don’t generally go beyond 2 demat accounts and that also you must only have two accounts if you are confident of transacting on both the demat accounts. Otherwise, it is just an additional cost with no additional benefits. What to do if you have around 6 or seven demat accounts with some shares in all of them?
The first step is to consolidated these demat accounts into one or two demat accounts. You can do an off market transfer of these shares into these target demat accounts and that does not attract any capital gains tax on you. Make it a point to close the other demat accounts and retain the acknowledged copies with you. This can help you run a leaner and meaner demat system for your holdings.