What happens to MF and equity folio if investor dies without nominee? Impact of opting out of nomination explained

The Securities and Exchange Board of India (Sebi) guidelines require mutual fund investors and demat account holders to either register a nominee or formally opt out of nomination. Sebi introduced this rule to ensure that every investor explicitly records their choice, ensuring that the nominee can claim the securities in the event of the owner's death.

Under these guidelines, investors cannot leave the nomination field blank. They either have to submit a nominee's details or a signed declaration to opt out at the time of opening an account or for existing folios.

If you opted out of appointing a nominee, the holdings do not lapse. But there is a process in place to transfer the securities to the rightful claimants. Here's how the entire process works in such situations.

What happens to securities after an investor's death?

If no nominee is registered, the holdings are transferred to legal heirs through the transmission process. However, the process becomes more “documentation-intensive and time-consuming,” according to Abhishek Bhilwaria, BhilwariaMF, an AMFI-registered MFD.

“In such cases, the legal heirs must establish their claim using valid succession documents. Sebi has made nomination or opt-out mandatory to avoid such delays and complications,” he said.

Meanwhile, Charu Pahuja, Group Director & COO of Wise FinServ, said that getting a succession certificate can take months or even over a year. During that period, the assets remain frozen. “There's no one the depository or fund house can legally hand them over to without a court's say-so,” she added.

Without a nominee, the legal heirs must produce a death certificate and proof of identity and relationship. Beyond that, it depends on whether there is a will. “If there is, heirs need a probate from court. If there isn't, they need a succession certificate, also from court,” Pahuja said.

“For smaller-value holdings, some fund houses and depositories will accept a notarised indemnity bond and an affidavit, but that's at their discretion and not guaranteed. For significant holdings, there's really no shortcut. It's a formal legal process, and the family should ideally get a good lawyer involved early,” she added.

What happens if the nominee and legal heirs are different people?

The experts explained that a nominee is not the owner of your assets. They only act as a trustee or custodian of the securities and not the final owner. “A nominee can receive the assets, but the actual ownership goes to the legal heirs, as per the Will or succession law,” said Pahuja.

This essentially means that if a person has named their brother as the nominee but the investor's spouse is the legal heir, then the spouse retains the rightful claim to the assets. In case of a dispute between the nominee and legal heirs, the latter can challenge the nominee's claim in court, the experts advised.

“They just have to go through a legal process to establish it. Ideally, your nominee and your heirs should be the same person or, at the very least, your Will should spell out your intentions clearly,” Pahuja said.

How is the transfer of shares due to an investor's death taxed in India?

When investments pass from a deceased person to their heir, it's treated as an inheritance, not a sale or transfer; hence, capital gains tax is not applicable at the point of receiving the assets. However, the tax will apply if the recipient chooses to liquidate the holdings.

“The heir steps into the shoes of the original investor: they inherit the same cost basis, and the original owner's holding period counts towards theirs. Capital gains tax only kicks in when the heir eventually decides to sell,” Pahuja said.

Does the process differ between MF, demat shares and physical shares?

The process for transferring holdings after the original investor's death differs across mutual funds, demat shares and physical share certificates. Here's how each transfer works:

For mutual funds, a transmission request must be submitted to the asset management company or its registrar, which typically processes it based on a standard set of documents. Meanwhile, demat shares are transferred through the investor's depository participant linked to NSDL or CDSL.

Physical share certificates tend to be more cumbersome. Claimants are required to submit the original certificates along with the necessary transmission documents to the company's registrar and transfer agent.

“Sebi has been pushing hard for investors to de-materialise physical shares — partly for this exact reason. If you're still holding physical certificates, converting them to demat form is genuinely one of the most important financial housekeeping steps you can take,” Pahuja said.