We all know that having a trading account does not entail any charges. You only need to pay for debits in the trading account. But demat is a different ball game altogether. There are a variety of costs that get debited to the demat account and billed to you bank on a periodic basis. Whether it is the opening of demat account online or offline, there are demat account charges along the way. Even when a company says they are offering demat account with zero AMC, that is normally applicable only for the first year. For subsequent years, the AMC or annual maintenance charges will be levied. So, there are demat account with the lowest charges but really no demat account that is totally free.
Demat account is a repository of your shares and other securities. It is almost similar to the way you hold funds in your bank account. Similarly, you hold shares in your demat account. Today, you are likely to be deluged with advertisements of Free Demat Accounts. But remember there are demat account with lowest charges but not free demat account. Also, when they claim demat account with zero AMC, it is normally applicable only for the first year. Here is what you need to know about demat charges.
1. The confusion over demat account opening charges
The primary question is whether depository participants can charge account opening charges. SEBI has already prohibited the charging of demat account opening charges, as a result of which most brokers offer zero account opening of DP account today. However, this zero charge only applies to opening of demat account. Free demat is normally feasible for banks as they get money float from the account holder. So they can afford to not charge.
While banks to benefit from the float of the individual’s savings account, that is not the case for most other brokers. Today, full service brokers also offer free demat account opening, but low cost brokers compensate their cost in the form of other administrative charges. There are charges for the legal stamp paper charges in case of Power of Attorney execution. While that is not called account opening charges, it is billed as other costs.
Table of Content
- 1. The confusion over demat account opening charges
- 2. Annual maintenance charges (AMC) is the real cost in demat account
- 3. Explore the idea of Basic Services Demat account (BSDA)
- 4. Levy of transaction and custodial fees on demat accounts
- 5. Dematerialization charges for physical to demat shift
- 6. Miscellaneous charges levied on the demat account
2. Annual maintenance charges (AMC) is the real cost in demat account
While DPs waive off the account open charges, there is the annual maintenance charges (AMC) that is levied each year on the client. These charges vary from Rs.300 per annum to Rs.800 per annum and that is entirely at the discretion of the DP. Remember that free AMC normally does not mean free for lifetime. Many brokers offer to absorb the AMC charges for the first year and only bill you from the second year onwards. Normally, banks charge lower AMC if the trading account is mapped to the same bank but charge higher if the trading account is not mapped to the same bank. So AMC exemption normally means only for the first year and not after that. How to reduce the cost of AMC charges in demat?
3. Explore the idea of Basic Services Demat account (BSDA)
The BSDA facility is relevant for small investors with a very small portfolio. SEBI has prescribed limits for being eligible for a BSDA facility. The Basic Demat Account is for investor accounts with custody value of less than Rs.200,000. Normally, under the basic services demat account (BSDA), the DPs will waive the annual AMC cost if the custody value is less than Rs50,000. However, a nominal charge is made if the custody value is more than Rs50,000 but less than Rs2 lakhs. In such cases, a nominal AMC can be charged. However, above Rs2 lakhs custody value, the charges would be applicable as normal on a pro-rate basis. The idea of the BSDA is to encourage small investors to also have a demat account and not sell out just because the charges are steep in the first place.
4. Levy of transaction and custodial fees on demat accounts
If you thought that the AMC is the only cost in a demat account, think again. As you start transacting in shares and holding larger custody value, the costs also increase There is a custody fee that is imposed by the 2 depositories; NSDL and CDSL on a per ISIN basis. ISIN is a unique security identifier. Since this is normally paid by the DP to the depository, they either waive this cost to the customers or charge a nominal flat fee.
In addition, there is also a per transaction fee which is imposed at a fixed rate per ISIN each time your demat account is debited. As you are aware, when you buy shares in demat account it credited and when you sell shares the demat account is debited. In the past, DPs used to charge for credits and debits to the demat account, but now SEBI has explicitly barred the DPs from charging for credits to the demat account. However, charges for debt to the demat are still levied by the DP.
5. Dematerialization charges for physical to demat shift
An important charge that is levied is the dematerialization charges which are imposed when you surrender physical certificates for dematerialization. The charges are a one-time charge and are levied on the number of certificates offered for demat. It is also possible to rematerialize shares from demat form back to physical shares. Here again, there is a REMAT charge that is levied on the customer. These are one-time charges only.
6. Miscellaneous charges levied on the demat account
The above charges we spoke about are all the charges in the routine nature of things. However, there are other charges levied by the DP on a case-by-case basis. Such additional costs on you depend on the nature of services demanded. There is no charge if you use the online DP facility but if you use the Debit Instruction Slip (DIS) facility then DPs do impose a cost per booklet or cost per leaf as administrative charge. There are occasions when your debit instruction fails or is rejected due to technical factors. In such cases, the DP imposes a penal charge on the customer. The DP charges you for physical mailing of demat statements of holdings and transactions. You are also charged a penalty for cheque return or cheque rejection or if there are demat dues beyond a certain deadline.
The moral of the story is that Demat charges need a holistic picture of all the costs; both direct and indirect. For that it is essential that you read in detail the fine print of the DP agreement which encompasses all these finer aspects and more. All the demat account information is available in the fine print.