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With the advent of technology, and subsequently dematerialization, securities are held in a digital form called a Demat account. Other than equity shares, Demat accounts also hold bonds, mutual funds, exchange-traded funds, etc.
Recently, it is virtually imperative to possess a Demat account for any investor. Furthermore, opening a Demat account for individuals and partnership firms is fairly straightforward. However, Demat account for a Trust is surrounded by a lot of ambiguity. Let’s debunk some of the myths around Demat account for Trusts.
According to the Indian Trust Act 1908, a Trust is an arrangement where the owner transfers the property to another for the benefit of a third person. The transferor is the owner, the transferee is referred to as the trustee and the third person is the beneficiary. A trust may be a private or public trust.
Under the Indian Trust Act of 1908, the registration of trust is mandatory in many cases. Thus, some trusts in India are registered whereas some are not. In both cases, a trust can open a Demat account. The procedure to open a Demat account varies based on the registration status of the trust.
For a registered trust, a Demat account can be opened in the name of a trust if it is registered under the Public Trust Act 1860, Societies Registration Act, Bombay Public Trust Act, Public Trust Act, or any other law in force in the state at the time. For an unregistered trust, a Demat account may be opened in the name of managing trustees as an individual account. If the trust has up to three managing trustees, then each managing trustee is a joint owner of the Demat account. But in cases where the trust has more than three managing trustees, then the trust will have to decide on a whose name to open the Demat account.
The procedure to open a Demat account for a trust is similar to that of a partnership firm. The following documents are required to open a Demat account for a trust –
Demat accounts of investors are held with depository participants (DP). A depository participant (DP) is an agent and must be registered with the depository. To open a Demat account, the trust must approach a DP and fill out the required forms for account opening. The account opening form must be supported by the requisite documents prescribed. The list of documents is as mentioned required to be submitted by the trust is mentioned above. Additionally, the original documents may be required for verification by authorized officials of the DP.
The trust has to sign an agreement with the DP in a prescribed standard format. The agreement lays out the rights and duties of the trust and the DP, a schedule of charges, and related terms.
Having executed the agreement, the DP will open the account in the system and assign a unique account number to the trust. The account number is also called BO ID i.e., Beneficial Owner Identification number and it must be used for all future transactions.
There are multiple advantages of opening an account as a trust.
The primary advantage is that a trust separates the control of securities from the owner. Thus, securities are held safely in the Demat account of the trust.
Secondly, the Demat account eliminates the risk of transfers and improves the efficiency of trading. The trust can hold various investments in a single Demat account. The DPS is required to furnish regular reports and statements to the trust and promote transparency between the trustees and the beneficiary.
In India, taxation of trust is governed by separate sections. Trusts can claim multiple tax benefits and improve the profitability of investments held in the Demat account.
You can open a Demat account by downloading the IIFL Capital Demat Account app.
It is absolutely safe to open an account in the name of the trust. Not only DPs but also trusts are subject to strict regulations. Additionally, Demat accounts held by a Trust also fall under the purview of SEBI.
A Demat account can be opened without a broker, it can be open with a DP. A DP can be a bank or financial institution. But in order to trade in the stock market, a trading account has to be opened with a SEBI registered broker or sub-broker.
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