How can you transfer assets from nominee to legal heir?

What is the process of transferring the money (FD and mutual fund units) received in 2021 by a nominee to the actual legal heirs and tax implications for both of them. - Anonymous

Nomination is merely a legal provision for establishing a custodian of the property/asset in the event of demise of the owner of the property. The nominee may or may not be the legal heir to the assets. They are merely caretakers/custodians of the assets until the legal heir is established, post which assets are transferred to the legal heirs. Legal heirs are established by either a will or the Succession Act (in the absence of a will).

A nominee does not receive the assets in personal capacity but as a custodian of the estate of the deceased person. This means that the nominee does not become the owner of the asset. Hence from a tax perspective, the transfer is not considered as transfer of capital asset by virtue of inheritance exception for the transferor, i.e., the estate of the deceased is not subject to any capital gains tax. The recipient, i.e., the legal heirs, are exempt from tax for receiving assets without any consideration by virtue of inheritance exception. Hence, there is no tax liability to any party in case of inheritance.

Transfer of assets from nominee to legal heir
However, it is not possible to transfer certain assets such as fixed deposits, units of mutual funds, etc. As a nominee, you would have to close the fixed deposit accounts, redeem units of mutual funds and then transfer the money to the legal heirs.

Tax implications
In such a scenario, the estate of the deceased would be subject to capital gains tax on sale of units of mutual funds. The recipient, i.e., the legal heirs would not be subject to any tax.

Hence, it is advisable to keep the legal heirs as nominees in case of fixed deposits and units of mutual funds to avoid such a scenario. Also, be sure to have a will in place to ensure smooth transfer of assets to the legal heirs.

Suggested read: Do you have to pay tax on inherited mutual funds?