SEBI Proposes Tax Relief for Smoother Transfer of Inherited Shares

Inheritance of financial assets is a common reality, but the process is often filled with complexity, especially when securities are involved. While India has witnessed growth in digitisation with dematerialised (demat) accounts, transferring shares to legal heirs can still attract hefty taxes.

To address this issue of share transfer to legal heirs, the Securities and Exchange Board of India (SEBI) has floated a proposal to provide tax clarity and relief in such cases. As per the draft framework, SEBI seeks to eliminate wrongful capital gains tax charges on nominees by standardising reporting mechanisms with a new code titled ‘TLH’ (Transmission to Legal Heirs).

The proposal has far-reaching implications for investor protection, succession planning, and digital financial infrastructure in India.

SEBI Moves to Prevent Wrongful Taxation on Nominees

Currently, the transfer of securities from a deceased individual to a nominee or heir is governed under the Income Tax Act, 1961. Section 47(iii) of the Act clearly states that such transfers are not treated as “transfer” events and therefore should not attract capital gains tax.

However, in practice, many registrars and depositories incorrectly classify nominee transmissions as sales or transfers, triggering tax liability on nominees before the shares even reach the rightful legal heirs. SEBI observed that this misclassification not only undermines the spirit of the law but also places an undue burden on grieving families.

By floating its proposal, SEBI aims to ensure that inheritance is recognised for what it is and is not considered as a sale. This would provide immediate clarity and prevent litigation, thereby reinforcing investor trust in the system.

Introduction of a Standard Reporting Code: ‘TLH’

To operationalise this clarity, SEBI has proposed a uniform reporting code. Under the new framework, depositories, registrars, and related market entities will use the code ‘TLH’ whenever securities are transmitted from a deceased person to their legal heirs.

The benefits of this system are:

• Clear signalling to the Central Board of Direct Taxes (CBDT): By using ‘TLH’, the transfer is automatically classified as non-taxable.
   
• Uniform reporting across markets: Registrars and depositories will no longer apply inconsistent classifications.
   
• Protection of nominees: Nominees will not face wrongful tax scrutiny for transactions they merely facilitate.

This small but significant change will ensure that the legal heirs directly inherit the securities without the nominee being wrongly considered a seller.

Working Group and Implementation Timeline

The proposal stems from recommendations of a SEBI-constituted working group of Registrars and Transfer Agents (RTAs) after extensive consultation with stakeholders. The regulator has now invited public comments on the draft until September 2, 2025.

Once the final circular is issued, RTAs and depositories will be required to implement the TLH code within three months. The process will continue to be governed by the SEBI LODR Regulations, 2015, and the RTA Master Circular of June 23, 2025.

This phased approach ensures both clarity and adequate time for system upgrades.

Comparative Scenario: India vs. Countries Without Similar Relief

India’s proactive stance contrasts with practices in several countries where inheritance of securities may trigger immediate capital gains or estate taxes.

For example:

• In Germany, inherited shares can lead to estate duty obligations, and cash usage remains high because small-value digital transactions often involve merchant charges.
   
• In the US, capital gains are not levied immediately, but heirs face estate tax on large inheritances above a threshold.
   
• In India, however, the government has explicitly shielded heirs by clarifying that inheritance is not a taxable event, a position reinforced by SEBI’s proposed ‘TLH’ code.

This clarity not only protects families but also aligns with India’s larger goal of promoting digital wealth management and succession planning through demat accounts.

Advantages and Disadvantages of SEBI’s Move

Before introducing a policy of this scale, it is important to weigh its pros and cons.
 

Interpretation:
The advantages clearly outweigh the risks. While operational changes are required, the net impact is strongly positive for investor confidence and market transparency.

What are the Long-Term Benefits for India?

SEBI’s initiative is not just a technical reporting change—it has long-term socio-economic benefits:

• Encourages families to make use of nominations and estate planning tools.
   
• Reduces litigation and backlog in taxation disputes.
   
• Strengthens India’s standing as a trustworthy, investor-friendly jurisdiction.
   
• Creates smoother integration between financial markets and taxation systems, avoiding unnecessary disputes.
   

Industry leaders have already emphasised that these measures could promote deeper retail participation in equity markets, as confidence in smooth succession grows.

FAQs on Inherited Shares and Taxation

1. Will heirs pay tax on inherited shares?
No. As per Section 47(iii) of the Income Tax Act, inheritance is not a taxable transfer. Heirs are taxed only when they sell inherited shares in the market.

2. What role does a nominee play in inheritance?
A nominee acts as a trustee, facilitating transfer to the rightful legal heirs. They are not the owner unless they are also the heir.

3. Why is SEBI proposing the ‘TLH’ code?
Because misclassification by RTAs/depositories has wrongly triggered tax on nominees. ‘TLH’ ensures consistency and prevents such errors.

4. When will the TLH Code proposal be implemented?
SEBI has sought public feedback until September 2, 2025, after which RTAs and depositories will have three months to implement the code.

Conclusion

SEBI’s proposal to introduce the ‘TLH’ code for transmission of securities to legal heirs is a statement in strengthening investor protection in India. By eliminating the risk of wrongful taxation, the regulator ensures that inheritance remains a smooth, stress-free process for families.

In comparison with countries where inheritance often triggers immediate tax obligations, India’s progressive stance provides both relief and clarity to millions of retail investors. In the next decade, as more wealth is digitised and succession occurs through demat accounts, the significance of this clarity will only grow.

Ultimately, SEBI’s move is about trust and transparency—trust that investors’ wealth will pass on smoothly to their families, and transparency that the tax system will not penalise them for circumstances beyond their control.

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