Sebi’s New TLH Code for Inherited Securities: A Game-Changer for Tax Clarity

For decades, investors in India have worked hard to build wealth through shares, mutual funds, and other securities.

But what happens when that wealth gets passed on to the next generation?

Logically, the law should make this process smooth and tax-free, especially because inheritance has always been exempt from capital gains tax under the Income Tax Act of 1961.

Yet in reality, heirs often faced a rude shock.

Despite never selling a single unit or share, they were issued notices from the Income Tax Department, treating inherited securities as if they were “sales.”

Imagine the confusion and frustration of receiving a tax demand letter for something you never earned or sold!

This long-standing flaw has caused immense stress for families already dealing with the emotional weight of loss.

Recognizing this, SEBI has proposed the Transmission to Legal Heirs (TLH) code, a move aimed at cleaning up reporting systems and protecting heirs from wrongful taxation.

But here’s the key question: will this new system finally resolve the issue, or is it just a Band-Aid on a much deeper wound?

Table of Contents

1. The Problem: How Heirs Were Wrongly Taxed
2. What the New TLH Code Does
3. Why Misclassification Happened in the First Place
4. Will This Code Really Fix the Problem?
5. The Roadblocks: Compliance and Risk of Misuse
6. What Families Should Do: Estate Planning Beyond TLH
7. Final Thoughts – Why Professional Guidance is Key

1. The Problem: How Heirs Were Wrongly Taxed

Let’s take a simple example. Suppose your father leaves you 1,000 shares of a listed company.

You don’t sell them; you merely inherit them. In the eyes of the law, this is not taxable — you’ve just become the new owner of his shares.

But here’s where the mess begins.

When the registrar or depository records the transfer of those shares from your father’s name to yours, their systems wrongly classify it as a “sale.”

That incorrect entry gets passed on to the tax department, which then automatically assumes you owe capital gains tax.

And it doesn’t end there. In many cases, nominees (who are legally only custodians or trustees, not heirs) were also taxed, even though they weren’t the actual beneficiaries of the securities.

The distinction between nominee and heir — something already tricky in Indian law — only added fuel to the fire.

So what should have been a straightforward transfer of wealth turned into a battle of tax notices, clarifications, and appeals.

For grieving families, this was not just a financial issue, but an emotional one too.

2. What the New TLH Code Does

SEBI’s proposed Transmission to Legal Heirs (TLH) code is essentially a reporting upgrade — but one with major implications.

Here’s how it works: whenever securities are transferred due to inheritance, registrars, depositories, and other intermediaries will apply a special TLH tag to that transaction.

This tag acts like a digital marker, clearly distinguishing an inheritance transfer from a normal sale or purchase.

Why is this important? Because when these records reach the Central Board of Direct Taxes (CBDT), they’ll instantly recognize that this was an inheritance — and therefore exempt from capital gains tax.

No more wrongful notices. No more unnecessary disputes.

In theory, this new tagging system will close the gap between how the law is written and how it’s applied in practice.

For heirs, this could mean the end of years of confusion and harassment over taxes they never owed in the first place.

But then again, as every investor knows, theory and practice don’t always align. Could errors still creep in? That’s something worth considering.

3. Why Misclassification Happened in the First Place

So how did we end up here? The problem boils down to a disconnect between legal clarity and operational execution.

• Legally: Section 47(iii) of the Income Tax Act clearly states that inheritance is not a “transfer” for tax purposes. In other words, no capital gains tax applies.
• Operationally: Registrars and depositories didn’t have a standard mechanism to report “inheritance.” Their systems weren’t designed to differentiate it from a normal off-market transfer. So, by default, they simply marked it as a sale.

That small gap in reporting led to a big problem: once the transaction was labelled as a sale, the tax system treated it as one, generating automatic notices for heirs.

This mismatch highlights a broader issue in India’s financial ecosystem: sometimes, laws evolve faster than operational systems, leaving investors to deal with the consequences.

The TLH code is an attempt to bridge this gap — but history reminds us that such fixes require strict monitoring to truly succeed.

4. Will This Code Really Fix the Problem?

On paper, the TLH code looks like the perfect solution.

A single, standardized tag that clears confusion between a taxable transfer and an inheritance — isn’t that exactly what investors have been asking for?

Yes, but here’s the catch. While it addresses the symptom (wrongful tax notices), it doesn’t fully cure the disease — the deeper inconsistencies in how Indian laws treat nominees and heirs.

For example:

• Under the Income Tax Act, inheritance is tax-free.
• Under the Companies Act, a nominee is simply a custodian.
• But under the Depositories Act, certain interpretations have given nominees rights that sometimes conflict with heirs.

This legal tug-of-war means that while the TLH code will reduce wrongful assessments, it may not end disputes completely.

Families might still face litigation when multiple heirs or contesting claims are involved.

So the TLH code is a big step forward, but let’s be realistic — it’s not the final destination.

Until these overlapping laws are harmonized, the risk of confusion will always remain.

5. The Roadblocks: Compliance and Risk of Misuse

We all know that drafting a regulation is one thing, and implementing it is another.

The true test of SEBI’s TLH code lies in whether registrars, depositories, and intermediaries can adapt quickly and flawlessly.

Consider this: all entities have just three months to update their systems, retrain staff, and introduce new reporting protocols.

Will every institution be ready in time? Or will we see teething problems with delays, misreporting, and continued disputes?

And then there’s the human element.

What if someone attempts to abuse the TLH tag?

Imagine a scenario where a person tries to mask a taxable transfer of shares as an inheritance to dodge capital gains tax.

Without strong checks and audit trails, such misuse could slip through.

This means regulators will need to be extra vigilant.

Stronger oversight, data audits, and clear guidelines for verifying inheritance claims will be essential.

Otherwise, the TLH code may unintentionally open the door to new risks while solving old ones.

6. What Families Should Do: Estate Planning Beyond TLH

For individual investors and families, the TLH code brings welcome relief — but here’s a reality check: it’s not a substitute for proper estate planning.

Ask yourself: Do your family members know exactly what assets they would inherit if something were to happen to you tomorrow?

Do you have a clear, legally enforceable will in place?

Or would they be left to navigate nominee-versus-heir disputes in the middle of a tax battle?

Here are some proactive steps families should prioritize:

• Update nominations regularly across all financial instruments — from bank accounts and mutual funds to shares and insurance policies.
• Draft and register a legally valid will to clearly establish who inherits what.
• Don’t rely solely on nominees — they are trustees, not heirs. The real ownership always lies with heirs under succession laws.
• Address multiple-heir situations early. Documenting succession plans upfront avoids unnecessary conflicts later.

Think of it this way: the TLH code is like a safety net.

But without a strong foundation of estate planning, your family could still be left vulnerable.

Wouldn’t you rather plan today to save your loved one’s unnecessary stress tomorrow?

7. Final Thoughts – Why Professional Guidance is Key

At its core, the TLH code is a much-needed step to correct a long-standing operational flaw in India’s securities market.

It reduces the risk of wrongful taxation and smoothens the transfer of inherited assets. But is it the ultimate solution? Not quite.

Families still need structured estate planning, legal clarity, and expert guidance to ensure wealth transfers happen seamlessly and without disputes.

This is where working with a Certified Financial Planner (CFP) can make all the difference.

A CFP can:

• Help align your estate planning with long-term financial goals,
• Ensure your assets are tax-efficiently structured,
• Guide you through documentation and compliance,
• And, most importantly, give your family the peace of mind that comes from having everything clearly planned.

At the end of the day, regulations may change, but proactive planning is timeless.

The TLH code may save heirs from wrongful taxes, but your foresight and professional financial planning are what truly safeguard your family’s legacy.