Alerts & Updates 13th Aug 2025
The Securities and Exchange Board of India (SEBI) has issued a consultation paper on August 12, 2025 (Consultation Paper), seeking public comments on its draft circular aimed at facilitating smoother transmission of securities from a nominee to a legal heir. Under the current framework, SEBI had made it mandatory for the holders to provide ‘choice of nomination’ for such demat accounts that were opened after October 01, 2021, and mutual fund units that were issued after October 01, 2022. Investors have been consistently prompted to update their nominee details for demat accounts, mutual fund folios, and physical folios.
The primary purpose of choosing a nominee is to ensure an intermediary (such as a depository participant or registrar and transfer agent) can transmit securities in its custody to the nominee upon the death of the original holder of the security. Judicial precedents have made it clear that the nominee acts merely as a trustee and that the legal rights to the securities ultimately vest with the rightful legal heirs.
The Consultation Paper and the draft circular address a key problem that has emerged in practice, i.e., the further transmission of securities from the nominee (as trustee) to the legal heir is often reported as a normal sale, with the nominee being taxed on capital gains. This is in contrast with clause (iii) of Section 47 of the Income Tax Act, 1961, which does not treat this transmission as a ‘transfer’. Consequently, the nominees often end up paying paid capital gains tax in these circumstances, even though the nominees are merely a holder of the securities and the actual owner of the securities are the legal heirs.
| ELP Comments | |
| Nominees being merely a holder and facilitator of securities on behalf of the legal heirs are not beneficiaries of the securities held by them and therefore, the said transmission cannot be termed as a ‘sale’ of the said securities. The transmission of securities from the nominee to the legal heir is only a process which ensures that the securities are held by the nominee till the interest of the securities vests in the legal heir. Therefore, ‘capital gains’ on the transmission of securities to a legal heir cannot exist.
The proposed introduction of the “TLH” reason code is a much-needed step towards eliminating ambiguity in tax treatment of transmission of securities from nominee to legal heir. This will ensure that nominees are not unjustly assessed for capital gains tax in scenarios where they are merely facilitating the transmission of securities held in trust, thereby, aligning reporting practice with the actual legal position under the relevant provisions of the Income Tax Act, 1961. It will also provide greater clarity and uniformity for intermediaries and ease the compliance burden for both market participants and legal heirs. SEBI’s move reflects positive engagement with stakeholders’ and investors’ concerns and is likely to be well received by the securities market ecosystem. |
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Submission of Comments– Public comments are sought on the aforesaid draft circular. The comments can be submitted latest by September 02, 2025, to SEBI vide the link as provided on SEBI’s website.
We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.comor write to our authors:
KC Jacob, Partner, Email – kcjacob@elp-in.com
Shourya Tanay, Senior Associate- shouryatanay@elp-in.com
Mridula Bhat, Advocate – Email – mridulabhat@elp-in.com
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