Proposed Standard Regulation for Seamless Transfer of Shares to Legal Beneficiaries by SEBI
The Securities and Exchange Board of India (SEBI) has proposed a new standard reason code, ‘TLH’ (Transmission to Legal Heirs), to distinguish the transfer of securities from a nominee to a legal heir in reporting systems[1][2][3][4]. This move aims to address the current inconsistencies in the tax treatment of such transfers and prevent unintended capital gains tax liability on nominees.
The proposal follows deliberations by a working group comprising registrars to an issue and share transfer agents (RTAs). SEBI believes that the introduction of the TLH code will enable proper application of the provisions of the Income Tax Act, 1961, recognizing these transactions as non-taxable transmissions rather than sales[2][4][5].
Currently, some securities transmissions from nominees to legal heirs are being treated as normal sales of securities, leading to capital gains tax. However, under clause (iii) of Section 47 of the Income Tax Act, 1961, such transmissions are excluded from the definition of a “transfer” for tax purposes since the nominee acts merely as a trustee holding securities for the legal heirs[2][4][5].
By introducing the TLH code, reporting entities like brokers, registrars, depositories, and intermediaries can correctly report these transmissions to the Central Board of Direct Taxes (CBDT), which will help:
- Prevent incorrect capital gains tax on nominees who are only trustees.
- Ensure that the Income Tax Act provisions are correctly applied, recognizing these transactions as non-taxable transmissions rather than sales.
- Improve transparency and consistency in tax reporting relating to securities transmissions to legal heirs.
SEBI has invited public comments on this proposal with a deadline of September 2, 2025, and plans to implement the code following stakeholder feedback[1][3][4]. RTAs, listed issuers, depositories, and depository participants will be required to make necessary system changes to adopt the 'TLH' code within three months of the issuance of this circular.
In summary, the ‘TLH’ code aims to align the tax treatment of securities transmissions to legal heirs with Income Tax Act provisions, preventing unintended capital gains tax liability on nominees and easing compliance for investors and market intermediaries[1][2][3][4][5]. The procedural requirements for securities transfer will continue to be governed under the SEBI's LODR Rules, 2015, and the Master Circular for RTAs dated June 23, 2025, as updated from time to time.
[1] SEBI (2025). SEBI Invites Comments on Draft Circular for Introduction of TLH Reason Code for Securities Transfer. Retrieved from SEBI website
[2] Income Tax Act, 1961. Section 47(1)(iii). Retrieved from Indian Government website
[3] SEBI (2025). SEBI Proposes Standard Reason Code TLH for Securities Transfers to Legal Heirs. Retrieved from Business Standard
[4] SEBI (2025). SEBI Proposes TLH Reason Code to streamline Securities Transfers to Legal Heirs. Retrieved from Economic Times
[5] SEBI (2025). SEBI Proposes New Reason Code TLH for Securities Transfers to Legal Heirs. Retrieved from Money Control
The 'TLH' code, a proposed standard reason code by SEBI, is meant to align the tax treatment of securities transfers to legal heirs with those outlined in the Income Tax Act, 1961 [1]. By doing so, it aims to prevent unintended capital gains tax liability on nominees and streamline the process for investors and market intermediaries [2]. This move follows a ruling by clause (iii) of Section 47 of the Income Tax Act, 1961, which excludes such transmissions from being considered as a "transfer" for tax purposes [2]. SEBI has invited public comments on this proposal and plans to implement the code following stakeholder feedback [1].
