SEBI Simplifies Transferring Securities from Nominee to Legal Heir

Moneylife Digital Team 22 September 2025

Investor Interest

In a major step towards simplifying the investment experience, the market regulator Securities and Exchange Board of India (SEBI) has introduced a new mechanism to ensure seamless transmission of securities from a nominee to the rightful legal heir, thereby reducing tax-related hassles and procedural complexities. This change is expected to ensure that the correct provisions of the Income Tax (I-T) Act are applied and that nominees are not subjected to unnecessary tax deductions.

Under the current framework, a nominee is regarded as a trustee of the securities of the deceased security holder. The nominee is required to transfer the securities to the legal heir in accordance with the succession plan. However, during such transfers, nominees have often faced unnecessary assessments for capital gains tax. This is despite the fact that under clause (iii) of Section 47 of the Income Tax Act, 1961, such transmissions are exempt and not considered a ‘transfer’.

While nominees could claim refunds of the tax deducted, the process often led to delays and inconvenience. To address this persistent issue, SEBI constituted a working group (WG), which engaged with the central board of direct taxes (CBDT). The WG recommended the use of a dedicated reporting reason code transmission to legal heirs (TLH) to properly classify such transactions when reported to CBDT.

Accepting these recommendations, SEBI has directed that all reporting entities, including registrars to an issue and share transfer agents (RTAs), listed issuers, depositories and depository participants, must adopt the TLH code while reporting such transmissions.

While the taxation reporting framework has been streamlined, SEBI clarified that the procedural requirements for transmission of securities to legal heirs will continue to be governed by the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the Master Circular for RTAs issued on 23 June 2025, with subsequent updates.

The new system will come into effect from 1 January 2026, giving all stakeholders sufficient time to make the necessary system upgrades and procedural changes.

SEBI emphasised that this circular has been issued under its statutory powers under the SEBI Act, 1992, and the Depositories Act, 1996, with the objective of protecting investor interests and promoting ease of doing business in India.

This initiative not only provides clarity on the tax treatment of securities transmission but also reduces procedural delays, reinforcing SEBI’s commitment to investor-friendly reforms and the smooth functioning of capital markets.

Earlier Moneylife reported on SEBI’s consultation paper. (Read: Here Is How SEBI Proposes to Ease and Streamline Nomination Process for Investors). That consultation paper, released in February 2024, focused on ensuring that every investor either registers a nominee or expressly opts out, while setting clear rules on survivorship, recognition of Wills and intestate succession. SEBI’s data had revealed alarmingly low nomination levels in demat accounts, contributing to a surge in unclaimed investor assets.

By first addressing who should rightfully inherit securities through the nomination reforms and now ensuring smooth, tax-neutral transfer to heirs through the TLH reporting mechanism, SEBI is clearly adopting a holistic approach. These combined measures are aimed at protecting investors, reducing unclaimed wealth and making succession in the securities market faster, simpler and fairer.

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