Sebi Simplifies Share Transmission Process From Nominee To Legal Heir

Sebi Nominee Circular: The capital market regulator, Securities Exchange Board of India (Sebi) issued a circular on September 19 aimed at simplifying the process of inheritance of securities.

The market regulator identified a problem, wherein the nominee who facilitates the transfer of securities from the original security holder to the legal heir may get assessed for capital gains tax.

Notably, when an investor passes away, his or her securities are transferred to the appointed nominee. The nominee holds these securities in trust before transferring them to the original investor's legal heirs. However, this second transfer from the nominee to the legal heir is sometimes reported as a "sale." This, in turn, leads to the nominee being charged with capital gains tax on the transaction, even though they are not the ultimate beneficiary of the transfer of securities.

The regulator stated in its circular that the payment of tax by the nominee in such a situation is not appropriate. Sebi added that as per clause (iii) of Section 47 of the Income Tax Act, 1961, transmission of shares from nominee to legal heir is exempted and is not considered a transfer. Presently, nominees who were charged taxes can claim a refund of this tax. However, this process causes a lot of inconvenience to the nominee.

In order to streamline the reporting of such transfers, the market regulator formed a working group with the Central Board of Direct Taxes  (CBDT). The working group has recommended that reporting entities should use the code TLH (Transmission to Legal Heirs), while reporting such transactions to the CBDT, thereby solving the tax-hurdle for the transmission of securities.

"It has been decided that a standard reason code, viz., 'TLH' shall be used by the reporting entities while reporting the transmission of securities from nominee to legal heir, to the CBDT so as to enable proper application of the provisions of the Income Tax Act, 1961," Sebi said.

The market regulator added that other procedural requirements for the transmission of securities to legal heirs will continue to be the same under the provisions of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 and Master Circular for Registrars to an Issue and Share Transfer Agents dated June 23, 2025.

Notably, the new norms for reporting the transmission of shares will be implemented from January 01, 2026. Sebi urged RTAs, listed issuers, depositories and depository participants to take note of the changes and implement them accordingly.

The new changes are set to benefit retail investors by simplifying the share transfer process, as the TLH code will report the transaction as a tax-free transmission, not a sale. Ultimately preventing the nominee from being wrongly assessed for capital gains tax. By removing the potential tax hurdle, the process of transferring securities is also likely to become more efficient and prone to less delays.

Ultimately, the new provision for reporting tax is a significant step towards increasing the ease of doing business and ensuring that the inheritance of securities is a hassle-free experience for the families of deceased investors.