Nominee against legal heir: who receives, and who owns

The distinction in one sentence, and why it is so consistently missed

A nominee receives. A legal heir owns. Every complication in this area is a variation on that one sentence, and almost every argument about it comes from a family assuming that because a bank paid the money to one person without asking questions, the law had decided something. It had not. The bank had decided who to pay, which is a different decision and, from the bank’s point of view, the only one it is interested in.

It is worth being precise about why the institution behaves the way it does, because that behaviour is what misleads people. A bank holding a deposit after a customer dies has a problem: it owes the money to someone, it cannot adjudicate a family dispute, and if it pays the wrong person it is liable twice. Nomination solves the bank’s problem. Section 45ZA of the Banking Regulation Act, 1949 provides that where a nomination has been made, the nominee becomes entitled to all the rights of the depositor in relation to the deposit "to the exclusion of all other persons", and that payment in accordance with the section "shall constitute a full discharge to the banking company of its liability in respect of the deposit".

And then comes the sentence that decides this entire page. The proviso to that sub-section says that nothing in it "shall affect the right or claim which any person may have against the person to whom any payment is made under this section". The statute is not saying the nominee owns the money. It is saying the bank is finished with it, and that whoever else has a claim now has it against the nominee rather than against the bank. The identical structure appears in Section 45ZC for articles in safe custody and Section 45ZE for the contents of a safety locker.

That is the whole design. Nomination moves the asset out of the institution quickly and moves the dispute, if there is one, from the institution to the family. It does not resolve the dispute.

Nomination asset by asset: which statute, and what it actually does

The word "nominee" appears in half a dozen unrelated statutes, and it does not mean quite the same thing in all of them. Reading a general rule off one asset and applying it to another is the second most common mistake here, after assuming the nominee owns the money. The table below sets out what each provision actually says.

Two entries in it deserve to be read twice. Company securities — which for most people means listed shares and mutual fund units held in a demat account — are governed by Section 72 of the Companies Act, 2013, whose language is as emphatic as the banking provision: the nominee "shall … become entitled to all the rights in the securities … to the exclusion of all other persons". On the strength of that wording, nominees have argued for years that they take absolutely. In Shakti Yezdani v. Jayanand Jayant Salgaonkar the Supreme Court rejected the argument, holding that the nomination provisions in company law do not create a third mode of succession alongside testamentary and intestate succession, and that the vesting they speak of is for the purpose of dealing with the securities, not for the purpose of keeping them.

Life insurance is the other. It is the one place where Parliament has actually conferred beneficial entitlement, and it did so in narrow and specific terms — which is exactly why the exception cannot be generalised.

The life insurance exception, and its four limits

Section 39(7) of the Insurance Act, 1938 is the only provision in this area that plainly makes a nominee an owner. It says that where the holder of a policy on his own life nominates his parents, or his spouse, or his children, or his spouse and children, or any of them, the nominee is "beneficially entitled" to the amount payable, unless it is proved that the policyholder could not have conferred such a beneficial title having regard to the nature of his title to the policy.

Because it is the one clear exception, it gets quoted at every other asset class, and it does not travel. Four limits sit in the text and in the sub-sections around it.

1. 1It applies to a policy of life insurance on the policyholder’s own life. It says nothing about a bank deposit, a demat account or a flat.
2. 2It applies only where the nominee is a parent, spouse or child. A nominated sibling, nephew or friend falls under sub-section (6) — payable to them — and not under sub-section (7).
3. 3It does not defeat creditors. Sub-section (9) provides that nothing in sub-sections (7) and (8) operates to destroy or impede the right of any creditor to be paid out of the proceeds of a life policy.
4. 4It applies to policies maturing for payment after the commencement of the Insurance Laws (Amendment) Act, 2015. Sub-section (10) says so in terms, so the date the policy matures matters.

You are the nominee. What should you actually do?

The honest answer is: collect it, and then do not treat it as yours until you know whether it is. Collecting is right — leaving money in a dead person’s account helps nobody, and the institution wants it out. The mistake is what happens next.

1. 1Collect the asset. You are the person the institution is entitled to pay, and refusing to collect only delays the estate.
2. 2Keep it identifiable. Put it in a separate account rather than mixing it with your own money. If it later turns out you were holding for the estate, the difference between a traceable balance and a merged one is the difference between an accounting and an argument.
3. 3Find out whether there is a will. If there is, the will decides who gets it, and your nomination decides nothing except that you were the one who could collect it.
4. 4If there is no will, work out who the Class I heirs are and what each of them takes. The heir tree and the share worked examples on this site do that arithmetic.
5. 5Tell the other heirs what you have received. Almost every dispute in this area is really a dispute about not being told.
6. 6Distribute, or agree in writing that you are holding. A short family settlement, signed, is worth more than any amount of goodwill remembered differently three years later.

You are an heir and somebody else was the nominee. What now?

Your claim is against the nominee, not against the institution. That is what the proviso to Section 45ZA does: it closes the door on the bank and opens it on the person the bank paid. Understanding that saves a great deal of wasted correspondence, because letters to the bank asking it to reverse a payment made to a valid nominee will not succeed, and should not.

What works, roughly in order of cost:

• Establish who the heirs are, in a document an institution will recognise. In most States that is the legal heir certificate from the revenue office; in Delhi it is the surviving member certificate; in Andhra Pradesh and Telangana it is the family member certificate.
• Write to the nominee setting out the position, attaching the certificate, and asking for an account of what was received and a distribution of shares. Put it in writing and keep proof of despatch — it establishes the date from which you asked.
• Where there is a will, ask for a copy and check whether probate is required in your case before treating the will as settled.
• If the nominee will not account, the remedy is a civil suit for the recovery of your share, or an administration suit where the estate is substantial and several assets are in issue. Both are slow and both are usually worse for everyone than a settlement.
• Where the asset in question is a debt or a security rather than a receipt already collected, a succession certificate from the District Judge is the instrument that lets the heirs collect it directly.

Why this matters more than it looks like it should

Most of the time it does not matter at all, because the nominee is the spouse, the spouse is the principal heir, and nobody has any complaint. It matters in a small number of situations that are unfortunately common ones.

It matters when the nomination is stale. A nomination made when a person was twenty-four and single, in favour of a parent, and never revisited across a marriage and two children, will still be operative at sixty. The institution will pay the parent, correctly, and the family will then discover that the person entitled to receive and the people entitled to own are entirely different.

It matters where there is a second marriage, where children are from different marriages, or where the family has an estranged member. Those are precisely the situations in which nobody wants to discover, after a death, that a single unreviewed form decides who is holding the money.

And it matters where the money is needed. A nominee holding for the estate is not free to spend it, and heirs waiting on a distribution are not free to compel it quickly. The result is money that belongs to a family sitting immobile in one member’s account for a year. That outcome is entirely avoidable, and the way to avoid it is the next section.

Fixing it while you are alive: nominate and write a will, not one or the other

The advice that follows from all of this is unglamorous and takes an afternoon. Do both things, and make them agree.

Nominate on everything, and keep the nominations current. A nomination is what gets the asset out of the institution quickly, and an asset with no nominee is an asset your family will spend months prising loose — in the case of a debt or a security, possibly with a succession certificate and an ad valorem court fee. Review every nomination after a marriage, a birth, a divorce and a death in the family.

Then write a will, because the will is the document that decides who keeps what. Section 30 of the Hindu Succession Act, 1956 confirms that any Hindu may dispose of by will any property capable of being so disposed of. A will costs nothing to make, needs two attesting witnesses under Section 63 of the Indian Succession Act, 1925, and does not need to be registered to be valid.

Finally, make the two agree. Where the nomination and the will name the same person for the same asset, there is nothing to argue about: the nominee collects and the legatee keeps, and they are the same person. Where they differ, the will governs the ownership and the nomination merely decides who has to hand it over. Deliberately naming a different nominee and legatee is occasionally sensible — but do it knowingly, and tell both of them.

Worked examples