Nominee Or Legal Heir - Who Gets the Money? Indian Laws Explained?

One of the most common misunderstandings we encounter, especially among seniors, is the belief that making someone a nominee for your bank FD, mutual funds, P2P lending account, bonds, etc., means they'll receive your money after you're gone.

But in India, a nominee is just a caretaker. The nominee holds the money temporarily. Legally, it belongs to your legal heirs-your spouse, children, and sometimes parents-unless you've written a will.

According to SEBI data, only 38% of Indians understand the legal difference between a nominee and an heir. That number is likely far lower in Tier 2 and Tier 3 cities, where informal advice and family assumptions often override legal guidance.

Most seniors take utmost care of their wealth to ensure that their hard-earned wealth over a period of time is safe. However, what they miss out on is that succession planning is significant.

"Even more confusing is that legal heirs are not the same for everyone. In India, succession depends on your religion and even your gender. For example, when a Hindu woman dies without a will, her property may go to her husband's family before her own parents. That's the law," said Neha Juneja, CEO & co-founder of IndiaP2P.

He Named His Brother As A Nominee. His Wife And Kids Paid The Price

A man had nominated his brother for a fixed deposit long before he got married. He later had a wife and children, but never updated the nomination. When he passed away, the bank released the money to the brother. The family had to go to court - not only to fight for their legal right but to challenge what they thought had already been secured.

This is one of the most common legal traps seniors fall into - and it's not because they're careless. It's because the system has made it look simpler than it is.

"Most people believe that by adding someone as a nominee to their bank account, insurance policy, or mutual fund, they're giving that person legal ownership of the asset after their death. But that's not true. In law, a nominee is merely a custodian, not the owner. The nominee's job is to hold the asset on behalf of the legal heirs - not to claim it as theirs," commented Rohith Vedira from Sathpay.

Experts' Suggestions And Advice:

"There are succession planning strategies which not only help in smooth transfer of wealth to the designated heirs but also help in safeguarding wealth from future litigations and other hassles," said Gaurav Goel, entrepreneur and SEBI registered investment advisor.

"Many senior citizens believe that appointing a nominee guarantees their investments will seamlessly transfer to their loved ones. But legally, a nominee is only a trustee, not the rightful owner," said Sumit Sharma, founder, Radian Finserv.

"If there's a difference between the nominee and the legal heir, it can lead to disputes and delays in access. It's a common but costly oversight. Seniors must align their nominations with their will and legal heirs to ensure smooth, conflict-free asset transfer."

"Legally, a nominee is a custodian, not the beneficiary. The nominee's role is to ensure smooth transmission of assets to the deceased's estate and not to become its rightful owner, unless otherwise specified by law or a valid Will," stated Rohit Raj Chauhan, founder, Ingood.

"The actual ownership of the asset is determined by succession laws or by the will of the deceased. As per Indian law, inheritance is governed by personal succession laws, and in the absence of a clear will, the legal heirs-as defined under these laws-are entitled to the deceased's assets. Hence, nomination when done with the purpose of passing on financial legacy could be challenged as per law," said Mayank Bhatnagar, Co-Founder & COO, FinEdge.

Examples: Legal Precedents Clarify the Position

Indian courts have consistently maintained that nomination does not override succession laws or a valid Will:

• Sarbati Devi v. Usha Devi (1984, SC): The Supreme Court ruled that under Section 39 of the Insurance Act, the nominee is merely a trustee, not the rightful heir to the proceeds of the insurance policy.

• Shakti Yezdani v. Jayanand Salgaonkar (Bombay HC, 2017): The Bombay High Court held that a nominee of a flat in a cooperative housing society does not become the owner; the legal heirs, as per succession law or Will, have the rightful claim.

• Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd. & Ors (Bombay HC, 2010): Clarified that in the case of shares, the Companies Act overrides and allows nominees to inherit shares, but even then, a Will can dictate otherwise.

Despite these rulings, the lack of clarity continues to create confusion. According to the Reserve Bank of India (2022), over Rs 35,000 crore remains unclaimed in Indian financial institutions-often due to nomination-versus-heir disputes, unclear Wills, or absence of estate planning.

Class of Asset: Legal & Operational Position

Employee Provident Fund (EPF)

Succession laws override nomination in EPF. EPF rules mandate the nomination of a family member. Legal heirs have no claim if a valid nominee exists.

Public Provident Fund (PPF)

The nominee gets custody of the amount. However, legal heirs are entitled to own it. A Will or succession certificate will be required for claim settlement beyond nominee custody.

Bank Deposits (Savings, FDs)

The nominee acts only as a caretaker. Legal heirs are entitled to the funds. The bank may release the amount to the nominee, but heirs can claim their rightful share.

Mutual Funds

Nominees are custodians; legal heirs inherit the units. Legal heirs inherit units; new SEBI guidelines reinforce the nomination's administrative nature.

Shares

Under Section 109A of the Companies Act, the nominee is entitled to the shares. However, courts recommend that a valid Will supersedes a nomination, and legal heirs can challenge this if not aligned.

Life Insurance

If the nominee is a beneficial nominee (spouse, parents, or children), they get full claim. Otherwise, the nominee holds in trust for legal heirs. The concept of beneficial nomination was introduced in 2015 via IRDAI.

Why Does This Matter For Senior Citizens?

Most senior citizens diligently fill out nomination forms but neglect to draft or update a Will. Without a valid Will:
• Assets may be distributed based on personal laws (Hindu, Muslim, Christian), which may not reflect the deceased's intent.
• Family members may end up in litigation, especially in blended families or where financial dependency varies across heirs.
• The tax and probate process could become costlier and more time-consuming.

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