Demystifying Demat Account Compliance: A Guide To Ensuring Your Investments Stay Secure

In line with CBDT notification, stock exchanges, depositories and SEBI have made it mandatory to link PAN with Aadhaar numbers, failing which investors now face severe restrictions

A Demat account is a digital vault that stores all stock investments made by an investor.

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By Sandeep Agrawal

The Central Board of Direct Taxes (CBDT) substituted Rule 114AAA in March 2023 which provided for deactivating Permanent Account Number (PAN) in case the same is not linked with Aadhaar. As a result, the PAN holder will become ineligible for refunds, interest in pending refunds, and higher TDS/TCS rates.

This was done to de-duplicate the PAN database, as there were numerous instances of one person holding multiple PANs or a single PAN being used by more than one person. The origins of this compliance can be traced back to the Finance Act, 2017, wherein section 139AA was introduced into the Income Tax Act, 1961. The freshly minted provision made the Aadhaar number mandatory for filing Income Tax Returns (ITR) as well as for obtaining a PAN. Existing PAN holders were also directed to link their accounts with Aadhaar. National Securities Depository Limited (NSDL) directed its participants that in the event of non-linkage, defaulting demat accounts will be deemed to be Know Your Customer (KYC) non-compliant and be suspended/ frozen.

In line with CBDT notification, stock exchanges, depositories and SEBI have made it mandatory to link PAN with Aadhaar numbers, failing which investors now face severe restrictions. Without an operative PAN, they cannot trade shares and securities. Their demat accounts are frozen, making them unable to exit their holdings. In addition, all SIPs stand cancelled, and the investor is unable to use Margin-Traded Funds (MTFs) as shares in the demat account cannot be pledged or unpledged.

A 'Dematerialisation Account' (Demat account) is a digital vault that stores all stock investments made by an investor. It safeguards against loss and forgery of shares and securities and has simplified the process of share transfer, share conversion, share liquidity, and receiving dividends and refunds. Investors need to open a demat account with a custodian of securities, a depository participant, or another person registered with SEBI for investment purposes.

The account opening process involves a KYC process wherein investors are required to provide their name, address, phone number, email address, income, and PAN. Over the years, KYC has proven to be a critical process in the fight against illicit criminal activities. It protects financial institutions against fraud, corruption, money laundering, and terror financing activities. As KYC clearly establishes the identity of the customer, it allows institutions to ensure that their services are not being used for illegal activities. PAN, in consonance with KYC, allows these institutions to ascertain the source of their funds, identify suspicious financial activity, and keep a check on money laundering activities. This makes PAN an integral part of financial markets and a way for authorities to monitor investors' income and gains and create an audit trail.

We are now well past the deadline for the linkage and accounts not linked with Aadhaar have now become inoperative. However, investors can still link their Aadhaar by paying a fine of INR 1,000, which will make their PAN operative again. Investors can visit the CBDT website and link their PAN with their Aadhaar in a few clicks within a handful of minutes.

The writer is the director and co-founder at Teamlease Regtech.

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