The Securities and Exchange Board of India (Sebi) has proposed a new ‘Transmission to Legal Heirs’ (TLH) code to address a long-standing problem in securities transfers: wrongful capital gains taxation on inherited assets. While experts welcome this as a much-needed structural correction, they caution that its success will depend on procedural clarity, technological integration, and legal consistency across multiple statutes.
Why the TLH Code Is Needed
Transfers of securities to heirs have often been mistakenly treated as taxable sales, even though the Income Tax Act, 1961, explicitly exempts them under Clause (iii) of Section 47. According to Prateek Bansal, partner at White and Brief Advocates and Solicitors, this misclassification occurs because nominees are assessed for capital gains on assets they never beneficially owned.
The root of the problem lies in how registrars, depositories, and automated reporting systems classify these transfers. Without a standardized mechanism, inheritance-based transfers were often tagged as commercial transactions, triggering tax liabilities for legal heirs and nominees.
How the TLH Code Works
Under Sebi’s draft proposal, registrars, depositories, and other intermediaries must use a standard TLH code when reporting inheritance transfers to the Central Board of Direct Taxes (CBDT). This ensures that transmissions due to death are flagged as non-taxable, aligning reporting systems with the Income Tax Act’s provisions.
Existing procedural steps under regulations such as the Listing Obligations and Disclosure Requirements (LODR) remain unchanged. The only modification is the reporting tag, designed to prevent misinterpretation by tax authorities. Stakeholders have three months from the circular’s issuance to integrate these changes into their systems.
Expected Benefits and Challenges
Experts anticipate immediate relief from wrongful tax assessments but warn that the code is more of a procedural patch than a complete fix.
- Reduction in Erroneous Assessments:
Dipesh Jain, partner at Economic Laws Practice, noted that transmissions under a nominee’s PAN often appear as third-party transfers. The TLH code, by ensuring proper tagging, should reduce such errors and protect legal heirs from undue tax burdens. - Compliance and System Integration:
In the short term, registrars, depositories, and issuers will need to update systems, train personnel, and synchronize processes with the CBDT. This could slow some transactions but is expected to create long-term efficiencies. - Legal and Procedural Alignment:
Experts like Bansal highlight unresolved ambiguities in how nominees are treated under the Companies Act, the Depositories Act, and the Income Tax Act. Without deeper legal harmonization, disputes over inheritance classification may continue despite the TLH code.
Risks and Potential Misuse
The new system could inadvertently slow transfers when multiple heirs or contested claims require extra diligence. Experts also caution about the possibility of misuse, where taxable transfers might be disguised as inheritance transmissions to evade taxes. This risk will require stricter audit mechanisms and robust data trails.
Implications for Families
For households, the TLH code underscores the importance of proactive estate planning. Clear nominations, well-drafted wills, and updated succession documents will make the transmission process smoother and minimize legal disputes. Experts recommend registering wills and keeping succession records updated to avoid delays and challenges during verification.
While the TLH code should offer immediate relief from wrongful tax assessments, its full success will depend on system readiness, legal clarity, and operational vigilance. For families, the message is clear: estate planning needs to move from being reactive to proactive, leveraging the TLH framework for smoother wealth transmission.
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Disclaimer
This article should not be interpreted as investment advice. For any investment decisions, consult a reputable financial advisor. The author and publisher are not responsible for any losses incurred by investors or traders based on the information provided.