Just as you hold cash in custody in your bank account, a demat account holds shares and other securities in custody. In fact, it goes one step further. It also processes corporate actions like stock splits, bonuses, rights, buybacks, and dividends through the conduit of the demat account itself.
However, there is one more role that the demat account plays. It facilitates the transfer of shares from one demat account to another seamlessly.
Understanding the concept of transfer of shares
When we buy or sell shares, the shares move from the demat account of the seller to the demat account of the buyer. However, this is a market-driven transaction and executed by the exchange clearing corporations. The transfer we are referring to here is an off-market transfer. Here, the shares move from one demat account to another without going through the stock market mechanism and that is why it is called off-market transfer.
Transfer of securities means moving securities from one demat account to another. When shares were held in physical form, they were done through transfer deed. Since shares are held digitally, these transfers can be done either manually or electronically. Let us delve into this aspect of demat account in greater detail.
Reasons for transfer of shares from one demat to another
There can be several reasons for transfer of shares from one demat account to another. Here are some popular reasons:
- You may have decided to change your trading broker for better services or lower costs. It is advisable to keep the broker and the DP same for ease of services. Here again, you have to change the DP, which requires you to open demat account with the new DP and transfer shares to that new demat account.
- Consolidation of multiple demat accounts is a common reason. You may have your shares spread across 6 or 7 demat accounts and it is an added cost to you. In such cases, you have to transfer shares out of the demat accounts you intend to close into the demat accounts which will continue to be in operation.
- Restructuring of holdings is also a common reason. Investors generally keep their long term investments and trading portfolio in different demat accounts. When you restructure this classification, you need to do demat transfers accordingly.
- Transferring shares as a gift to family members, friends or employees is a common reason for transfer of shares.
Methodology of transfer of shares – Manual demat transfer
Manual transfer of shares from one demat account to another is quite common. Here are the steps involved.
Note: To minimize erroneous transfers, depositories (NSDL & CDSL) now provide a facility for the investors and DPs to add and verify the beneficiaries before execution of off-market transfers including inter-depository transfers.
- Fill up the debit instruction slip (DIS) mentioning the names of shares, number or shares and ISIN of shares properly.
- Also fill up the beneficiary ID with DP and BO code along with the names of the beneficiary and their DP.
- Quantities and ISIN must be verified with the original demat account. The mode of transfer will be off-market and signature must be proper.
- The DIS fully filled up and verified must be submitted at the office of the DP and an acknowledgement obtained for the same. The transfer happens within 6-7 days.
In any transfer of shares, there are 4 parties; Transferor, Transferee, Depository Participant, and the Depository (NSDL or CDSL).
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Methodology of transfer of shares – Online demat transfer
Online transfer of demat shares can be done using the “EASIEST” facility of CDSL or by using the “SPEED-E” facility of NSDL. Here are the steps.
- Visit the website of depository (CDSL or NSDL), depending on where your DP account is affiliated. First, register for the “EASIEST” facility on CDSL or for the “SPEED-E” facility on NSDL. Fill up all relevant details online.
- Once the details are filled up, you need to send a copy of the form to your depository participant (DP). The DP will forward the same to the Central Depository.
- Once the details filled in the form are verified and ratified, you receive the login credentials online within 24 to 48 hours.
- You can use these login credentials sent to you to login and transfer your shares online from your demat account.
The process is much simpler online and also reduces the chances of errors. While the transfer of shares takes 6-7 days in the case of manual transfer, it can be completed in less than 3 days in the online process.
What are the tax implications of an off-market share transfer?
When you buy or sell shares in the market, it either results in short term capital gain or long term capital gain depending on the holding period. However, in an off-market transfer of shares from one demat to another, it is more nuanced.
- Transferring from one of your own demat account to another demat account is a non-taxable transaction and is treated as tax-neutral.
- Transfers to relatives done without consideration should be treated as gifts (with gift deed) and shall be taxed accordingly under the Income Tax Act, 1961. The Income Tax Act has a comprehensive definition of who can be defined as a relative.
- When you gift shares, there is no capital gains implication for you. For the recipient, capital gains tax has to be paid at the time of sale. Here capital gains will be calculated from the original acquisition price of the transferor and not the price on date of transfer.
It is always advisable to consult with your tax advisor and your financial advisor about the implications before effecting such demat transfer of shares.
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