SEBI proposes standard code for smooth transfer of securities from nominee to legal heir

The Securities and Exchange Board of India (SEBI) has proposed a new reporting framework for smooth transmission of securities from a nominee to the legal heirs of a deceased investor.

Standard reason code ‘TLH’ suggested

In a consultation paper released on Tuesday, the markets regulator said it intends to introduce a standard reason code “TLH” (Transmission to Legal Heirs) for use by registrars, depositories and other reporting entities while informing the Central Board of Direct Taxes (CBDT) about such transactions.

“In order to ensure proper reporting of the transmission of securities from nominee to legal heir, it is proposed to issue a circular on “Ease of doing investment - Smooth transmission of securities from Nominee to Legal Heir” to specify a standard reason code viz. “TLH” (i.e. Transmission to Legal Heirs) to be used by the reporting entities while reporting the transmission of securities from nominee to legal heir to Central Board of Direct Taxes so as to enable proper application of the provisions of the Income Tax Act, 1961,” it said.

No capital gains tax on nominee-to-heir transfers

SEBI noted that under the Income Tax Act, 1961, the transfer of securities from a nominee to a legal heir is not regarded as a “transfer” for tax purposes.

However, in practice, such transmissions are often reported as normal sales, leading to capital gains tax being levied on nominees, who are legally only trustees of the assets.

“The payment of capital gains tax by the nominee in such a situation may not be appropriate considering that that the nominee only acts as a Trustee for the benefit of the legal heir(s) of the original security holder and ultimately the securities which belong to the legal heir(s) are transmitted by the nominee to such legal heir(s),” SEBI said.

The proposal follows recommendations from a working group comprising Registrars to an Issue and Share Transfer Agents (RTAs), which held consultations with various stakeholders.

Based on the working group's recommendations, the markets watchdog has sought to make the reporting process more consistent and transparent.

SEBI has sought public comments on the draft circular, which directs RTAs, listed companies, depositories and depository participants to implement the “TLH” coding system within three months of the final circular’s issuance.