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Explore the Various Types of Demat Accounts in India – SBI Securities
What exactly do we understand by a demat account? Think of a demat account as the equivalent of a bank account. Just as a bank account holds your cash, the demat account holds shares and other securities in dematerialized (demat) form.
In India, there are 2 principal depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). A person opens a demat account with a depository participant (DP), who is typically a broker or a bank. The DP is affiliated to CDSL, or NSDL or both. Here we look at the types of demat accounts.
How many types of Demat Accounts are there?
In India, there are two types of demat accounts, i.e., Individual account and Non-Individual account.
Individual Account: This is further divided as individual resident and NRI (NRE & NRO)
Non-Individual: Partnership, LLP, Trust, Companies, HUF, etc.
Types of demat accounts are broadly classified based on whether the individual holder is a Resident Indian or Non-Resident Indian:
Regular Demat account for Resident Indians.
Repatriable & Non-Repatriable Accounts for NRIs
The need to understand the types of demat account arises as that is the basis to choose which demat account suits your needs. Let us turn to the details of classification of demat accounts.
1. Regular Demat accounts for Resident Individual (RI)
In a sense, this is the normal or default demat account commonly used. The regular demat account allows investors to hold and trade equity shares along with other securities electronically. Normally, this demat account is linked to a trading account on one end and a bank account on the other end so that the entire process of clearing and settlement happens smoothly. A regular demat account has no limit on the size or value of holdings. Regular demat accounts are subjected to annual maintenance charge (AMC), which would typically vary depending on the value of assets under demat custody, types of service provided or as decided by the DP.
In 2012, the Securities and Exchange Board of India (SEBI) introduced a new type of Demat account called the Basic Services Demat Account (BSDA)
Basic Service Demat Account (BSDA)
The Basic Service Demat Account (BSDA) was designed and introduced in India to make demat of shares more affordable.
The BSDA demat account can only be used for portfolios with holding value under Rs2 lakh. This facility is only available to individuals and only one demat account is allowed across all depository (CDSL & NSDL).
Many small investors with minimal portfolios did not feel the need to open demat accounts as their holdings were too small and did not justify the payment of annual maintenance charges (AMC). To help such investors, SEBI had allowed the introduction of basic services demat account (BSDA), which is a very plain vanilla form of demat account.
Such investors can enjoy the benefits of reduced maintenance charges. It must be noted that one person can only have one BSDA account across all DPs and this is to avoid splitting of BSDA accounts. If the portfolio value conditions are not met, then the BSDA account is automatically reclassified as a Regular Demat Account.
2. Repatriable & Non-Repatriable Accounts for NRIs
2a). Repatriable Demat Accounts
This is based on the residential status of the demat account holder. Non-resident Indians (NRIs) and persons of Indian origin (PIO) can have either a repatriable account or a non-repatriable demat account.
Let us understand repatriable demat accounts in greater detail first.
The repatriable demat account allows investors to invest in the Indian stock market and seamlessly transfer the funds (repatriate) outside India.
Here it must be noted that a repatriable NRI demat account must be mandatorily linked to an NRE (Non-Resident External) bank account only. This will be the mandated bank account for all repatriation pertaining to that demat account.
This facility enables NRI investors to repatriate up to US$ 1 million in each fiscal year. The benefit of a repatriable demat account is that NRIs can also keep the funds in India without repatriating it abroad. That option is always there.
2b). Non-repatriable Demat Account
This is once again a facility to NRIs, but such demat accounts held by NRIs do not have the facility of repatriating dividends and capital gains earned on the portfolio abroad.
This non-repatriable demat account does not permit the free transfer of funds outside India. The non-repatriable demat account is linked to an NRO (Non-Resident Ordinary) account, so the funds remain within India.
Even with this non-repatriable demat account, NRIs can invest in all the eligible Indian securities, but the only restriction is that it cannot be repatriated abroad. Instead, the funds must be held in India only.
Making the choice: How to select the right demat account
Here are 4 simple steps that will help you to zero in on the right demat account.
Check your portfolio and residency status. Accordingly go for a regular demat account, BSDA, repatriable NRI demat account, non-repatriable NRI demat account etc.
In case of NRI, focus on what is the source of income being used to invest and do you intend to take it abroad. If it is money earned in India, invested in India and to be kept in India, then non-repatriable demat accounts linked to NRO accounts are sufficient.
Never zero in on a demat account without considering the available alternatives and comparing the costs and quality of services offered by service providers.
Lastly, focus on convenience. The smartest thing to do is to keep your trading account and demat account in the same place. That way, you save a lot of hassles and uncertainties in clearing and settlement. Of course, listen to market feedback.
Now that you are clear about how many types of demat account are there and what are the types of demat account available. The next step is to make the right choice.
Source URL: https://www.sbisecurities.in/blog/different-types-of-demat-accounts-in-india
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Sovereign Gold Bond vs. Gold ETF: A Comprehensive Comparison for Smart Investors
Over the last few years, the concept of digital gold has arrived in a big way. It started off with gold ETFs and then came the highly popular Sovereign Gold Bond scheme. There are also other digital gold holding vehicles like international gold funds, gold futures and digital gold. In this blog, the focus would largely be on understanding the relative merits and demerits of the sovereign gold bond vs gold ETF debate, and which is more suitable and under what circumstances. Also, a comparison of gold ETF vs SGB is provided on parameters like liquidity, flexibility, charges and tax implications.
What are Sovereign Gold Bonds (SGB) all about?
SGBs or Sovereign Gold Bonds have been around in India since Nov-2015 and have been gradually gaining in heft. These SGBs are central government-backed bonds, denominated in grams of gold. The underlying holding in grams of gold is guaranteed by the central government. In addition, these sovereign gold bonds also bear an interest of 2.50% annually on the issue price, which is paid semi-annually to the investor. Investors also get an upfront discount of Rs. 50/- per gram if the payment mode is digital. SGBs are also advantageous as they do not have the hassles like storing gold, making charges, risk of loss etc.
What really stands out about the SGB is the sovereign guarantee and that the returns are pegged to the price of gold. What the government guarantees is the payment of interest at 2.50% per annum and the holding of gold in grams. Considering that gold has generally given positive returns over longer periods of time, it makes investment in SGBs relatively secure and attractive too.
The SGBs can be held either in physical form or in demat form, as part of the demat account.
Gold ETFs (Exchange Traded Funds)
Unlike SGBs that are issued by the central government, gold ETFs are issued by the mutual fund houses registered with SEBI. They are issued in the form of gold units pegged as equivalent to a certain weight in gold expressed in grams. Gold ETFs are typically closed-ended in that once the NFO period is over, the fund does not offer any purchase or sale of units. However, being Exchange Traded Funds, they are mandatorily listed on the stock exchanges and investors wanting to buy or sell gold ETFs can do so using their existing demat account and trading account.
Gold ETFs are very liquid and hence, entry & exit is hardly a problem without any price damage. You can trade in gold ETFs just as you trade in stocks. It must be noted here that gold ETF issuing mutual funds are required to maintain physical gold equivalent to the units sold with a gold custodian bank as a backing.
Sovereign Gold Bond VS Gold ETF
Let's compare the sovereign gold bonds and the gold ETFs on a variety of parameters like returns, risk, flexibility, liquidity, taxation, etc. This sovereign gold bond vs gold ETF comparison will allow investors to make the best choice.
Here are the highlights of the gold ETF vs SGB debate.
1. How do SGBs and Gold ETFs compare in returns?
Remember, both SGBs and gold ETFs are linked to the price of gold. If the price of gold goes up, then the capital appreciation will benefit the SGB and also the gold ETFs. The difference lies in the interest paid. For instance, SGBs pay an additional assured interest of 2.50% per annum, but such assured returns do not exist in gold ETFs.
2. How do SGBs and Gold ETFs compare in risk?
One can argue that since both are backed by gold, there is no asset risk; however, there is a difference.
Even though SGBs do not have physical gold backing, the returns on these bonds are pegged to gold prices. And they have an explicit guarantee by the central government regarding the gold holding and the interest payable. In the case of gold ETFs, there is no explicit guarantee (sovereign or otherwise) but they do have the physical gold with the gold custodian bank.
3. How do SGBs and Gold ETFs compare in taxation?
Gold ETFs are treated as non-equity assets and hence the capital gains, if any, would be treated as short-term gains if held for less than 3 years and taxed at the marginal tax rate applicable. If the gold ETFs are held for more than 3 years, they are long-term capital gains and they attract tax at 20% with the benefit of indexation.
In the case of SGBs, the method of taxation is the same, with just one critical difference. If the SGBs are held till redemption, then any capital gains on the SGBs are fully tax-free in the hands of the investor. However, interest on gold bonds is fully taxable.
4. How do SGBs and Gold ETFs compare in costs?
Sovereign gold bonds don’t have any recurring cost of ownership. Gold ETFs on the other hand, have annual charges, including brokerage and expense ratio ranging from 0.50 – 1.00%. The costing of SGBs is a lot more transparent than Gold ETFs.
5. How do SGBs and Gold ETFs compare in liquidity?
Gold ETFs can be bought and sold in the secondary market using your existing trading and demat account with your stock broker. SGBs can be bought at the new issue period, which can be several times during the fiscal year. Outside that, SGBs are listed on the stock exchange, but the liquidity is limited.
Let’s look at the table below to quickly review the gold ETF vs SGB debate
To sum up the sovereign gold bond vs gold ETF debate, both are digital modes of holding gold and are linked to gold prices.
Among 6 key parameters viz. fixed interest, taxation, liquidity, costing, purity and safety, SGB stands out across all. On the other hand, Gold ETFs are highly liquid and do not have a maximum investment limit, allowing investors to buy as much as they want while in case of SGBs maximum investment limit for individual investors is 4kg in a Financial Year
Eventually, investors need to take a call on the gold ETF vs SGB choice based on their financial goals & risk profile; and returns, risk, liquidity, taxation, & convenience the products have to offer.
Source URL: https://www.sbisecurities.in/blog/sovereign-gold-bond-vs-gold-etf
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