Summary of this article
Sebi has introduced new rules to ease the tax burden on appointed nominees for transmission of securities.
Earlier in 2021 and 2022 the appointment of nominees was mandated by Sebi for demat accounts and mutual fund folios.
Comments and suggestions on the draft circular along can be sent by September 02, 2025.
Investing in mutual funds and stocks can contribute greatly to one’s financial stability, and investors often try to extend the stability to their next of kin through the transmission process. The Securities Exchange Board of India has also tried to ease the transmission process for mutual fund units and stocks.
The market regulator has proposed to make the transmission of securities from the nominee to the legal heir simpler. The market regulator has also urged members of the public to send their comments and suggestions on the draft circular along with the rationale for their suggestions by September 02, 2025.
Sebi said in the draft circular that it has made efforts to streamline the process for appointing a nominee for the transmission of securities. The nominee acts as a trustee for the securities bought by the original investor and then facilitates the transmission of the securities to the legal heir.
Notably, in 2021 the market regulator made providing ‘choice of nomination’ mandatory for all demat accounts opened after October 01, 2021. A similar system of nomination was also made mandatory for Mutual Fund units from October 01, 2022.
The market watchdog mandated the appointment of a nominee so that the market intermediary is freed of its responsibility once the securities lying with it are transmitted to a nominee in the event the original investor passes away.
The market regulator identified a problem wherein the nominee may get assessed for tax while facilitating the transmission of securities to the legal heir. This happens as such transmissions are not reported properly and may be considered a sale of securities, resulting in capital gains.
The market watchdog stated that the levy of capital gains tax on the nominee is not ‘appropriate’ because the securities ultimately belong to the legal heir and are only transmitted by the nominee.
“Currently, transmission of securities from nominee to legal heir (in case the original security holder has provided nomination details) is not properly reported and may be considered as normal sale of securities and hence capital gain arising out of such transmission may be considered taxable in the hands of the nominee (transferor),” Sebi said.
To solve this problem, Sebi has proposed that a ‘standard reason code’ called “TLH” (Transmission to Legal Heirs) should be used by market intermediaries while reporting the transmission of such securities to the Central Board of Direct Taxes (CBDT), The proposal was made after consultation with several industry stakeholders and a working group comprising Registrars to an Issue and Share Transfer Agents (RTAs).
“Based on the discussions and various interactions, a proposal has been submitted by the working group wherein the reporting entities can use the reason code “TLH” (i.e. Transmission to Legal Heirs), while reporting the transactions related to transmission of securities from nominee to legal heir to the Central Board of Direct Taxes (CBDT),” Sebi said.
The market regulator urged several industry stakeholders such as RTAs, Listed Issuers, Depositories and Depository Participants to take note of the proposed changes and undertake amendments to implement the proposal after three months from the date of issuing the circular.
