SEBI Circular: Smooth Transmission of Securities from Nominee to Legal Heir

A new reporting framework to eliminate wrongful capital gains tax demands on nominees — what investors, nominees and their families must know

Reference:

• Circular: SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/130, dated 19 September 2025 — Ease of Doing Investment: Smooth Transmission of Securities from Nominee to Legal Heir.
• Applicable Law: Income Tax Act, 1961, Section 47(iii); SEBI (LODR) Regulations, 2015; Master Circular for Registrars to an Issue and Share Transfer Agents, dated 23 June 2025.

On 19-9-2025, the Securities and Exchange Board of India (‘SEBI’) issued a circular titled Ease of Doing Investment: Smooth Transmission of Securities from Nominee to Legal Heir. This circular introduces a uniform reporting framework to simplify the transmission of securities and eliminate unnecessary tax burdens for nominees. It has been operative since 1 January 2026.

Context & the Problem SEBI Has Addressed

• SEBI formally recognises the nominee as a trustee of the securities held by the original investor and not as the owner.
• The nominee does not acquire beneficial title to the securities. They hold them as a custodian pending transfer to the rightful legal heirs as per the applicable succession plan.
• Under the pre-existing framework, the nominee-to-legal-heir transfer was inadvertently reported as a "sale", triggering capital gains tax demands on nominees despite Clause (iii) of Section 47 of the Income Tax Act, 1961 expressly exempting such transmissions from being treated as a "transfer".
• Although nominees could claim a refund of wrongly assessed tax, the assessment-and-refund cycle caused significant procedural delay and compliance burden.
• To address this, SEBI constituted a Working Group which engaged directly with the Central Board of Direct Taxes (CBDT). The Working Group recommended a standardised reporting approach to prevent wrongful assessments at source.

The New Framework

The circular introduces a single, standardised reporting code — “TLH” (Transmission to Legal Heirs) — which all prescribed entities must use when reporting nominee-to-legal-heir transfers to CBDT. The code flags the transaction as a non-taxable event, ensuring the Section 47(iii) exemption is applied correctly at source and without the nominee having to pursue a refund.

THE TLH CODE

1. Transmission to Legal Heirs — A Standardised Data Flag

When reporting a nominee-to-legal-heir transfer to CBDT, the prescribed entity must use the reason code “TLH.” This flags the transaction as a non-transfer under the Income Tax Act, ensuring the exemption is recognised by the tax system without further action by the nominee.

ENTITIES DIRECTED TO IMPLEMENT

2. Who Must Incorporate the TLH Code

SEBI has directed four categories of market intermediary to make necessary system changes: Registrars to an Issue and Share Transfer Agents (RTAs), Listed Issuers, Depositories, and Depository Participants (DPs). All four must incorporate the TLH code into their CBDT reporting systems since 1 January 2026

WHAT CHANGES FOR NOMINEES & FAMILIES

3.Practical Impact

Nominees will no longer face erroneous capital gains demands when transmitting securities to legal heirs. The transaction will be correctly identified as a tax-free transmission and not a sale from the moment it is reported. Families navigating estate matters can expect a smoother, faster and less litigious experience when dealing with listed shares and demat assets.

4. TRANSMISSION PROCEDURE

The circular intervenes only at the CBDT reporting stage. The documentary and verification requirements for transmission of securities remain unchanged and continue to be governed by the SEBI (LODR) Regulations, 2015 and the Master Circular for Registrars to an Issue and Share Transfer Agents dated 23 June 2025. Nominees and legal heirs must still comply with all existing documentation requirements when processing a transmission request.

In Summary

This circular does not create a new right; it fixes the system that was failing to honour an existing one. From January 2026, the transfer of inherited investments from a nominee to legal heirs will complete without generating a tax demand that was never owed