(First published on Linkedin)
In a recent decision, the Karnataka High Court reiterated that the rights of a nominee and those of a legal heir are not the same, and that nomination by itself does not confer absolute ownership unless the statute expressly provides for it. The Court emphasised that while a nominee may be the person in whose name the asset is first transferred or who first receives the proceeds, the ultimate entitlement will follow the line of succession under the relevant personal or statutory law.
The terms “legal heir” and “nominee” are often used interchangeably, but the two concepts have very different legal consequences. A nominee is generally a custodian or trustee of the property until the rightful heirs are determined under the applicable law of succession, unless the governing statute provides otherwise. A legal heir is the person entitled to inherit as per the personal law or a valid will. This distinction plays out differently across various legal frameworks.
Under the Indian Succession Act, the principle is that nomination does not override succession. In the context of company shares under the Companies Act or insurance policies under section 39 of the Insurance Act, the nominee merely receives the proceeds and holds them for the benefit of the legal heirs, unless the statute expressly grants ownership to the nominee. The Supreme Court in Sarbati Devi v. Usha Devi clarified this position in the context of life insurance policies. Similarly, for immovable property, mutation in the name of a nominee does not displace the title of the legal heirs under succession law.
The Hindu Succession Act deals with inheritance in the case of Hindus, Buddhists, Jains and Sikhs. In the case of Hindu Undivided Family (HUF) property, on the death of a coparcener, the property devolves by survivorship. After the 2005 amendment, daughters have equal coparcenary rights as sons, with retrospective application to pending partitions, as affirmed in Vineeta Sharma v. Rakesh Sharma. Section 5 of the Act carves out exceptions for properties governed by other customs or special laws.
The Income-tax Act contains separate provisions dealing with succession. Section 159 makes the legal representative liable for the deceased’s tax liabilities. Section 168 deals with an executor under a will, who is treated as a separate taxable entity until the estate is fully distributed. Importantly, section 47(iii) and section 56(2)(x) provide that property received through inheritance is neither a taxable transfer for capital gains purposes nor subject to deemed gift taxation.
In the context of foreign securities, the FEMA Overseas Direct Investment Rules permit inheritance of foreign shares without prior approval, provided they are held in compliance with the rules. Reporting requirements, however, may still arise.
Under the SEBI Takeover Regulations, Regulation 10(1)(g) exempts acquisitions through inheritance from the obligation to make an open offer. Separately, Regulation 31A(6) of the SEBI LODR Regulations provides that if shares in a listed company are transmitted to a legal heir, the heir is automatically classified as a promoter if the deceased was a promoter, until a formal reclassification process is completed.
On stamp duty, most state laws exempt transfers of property through succession or under a will from duty. Where a will exists, the probate process in certain jurisdictions such as Mumbai, Chennai and Kolkata is mandatory for immovable property, and it converts testamentary intent into enforceable title.
Finally, the Companies Act distinguishes between nomination and transmission. Transmission occurs by operation of law to legal heirs. Nomination under section 72 of the Act is an administrative mechanism to ensure smooth transfer, but it does not override the rights of heirs unless the law specifically provides for such an effect.
Across all these laws, the consistent theme is that the nominee is a temporary holder, while the legal heir is the ultimate beneficiary, except where a specific statutory provision states otherwise. For effective succession planning, it is essential to align nominations with wills, HUF arrangements and statutory filings, to avoid disputes and ensure that property passes smoothly to the intended beneficiaries.