Everyone should secure their future, whether for retirement, the security of their family, or for emergencies. Mutual funds are highly sought after for this very purpose due to their long-term returns.

But what happens to your mutual fund holdings after your death? Can you choose who inherits these investments? Who gets the funds? Can you select whom you want to pass these mutual funds to?

Most commonly, investors understand that nominees receive the money. However, things can get tricky when investors do not put their legal heir as a nominee or haven’t mentioned the nominee at all, causing a big battle of potential beneficiaries in the court.

This article will discuss the difference between nominee vs legal heir to decode who gets your mutual funds when you die.

Who is Legal Heir

A legal heir has the right to inherit the property and possessions of a person who has passed away. As per the Indian Succession Act of 1925, individuals closely related to a person, such as children, spouses, parents, married daughters, and grandchildren, are called legal heirs. The will of the person who is deceased determines who owns the person’s assets.

Who is Nominee

A nominee is a person legally nominated to receive the benefits after the death of a specific individual. A nominee isn’t the final owner of your funds but acts as a trusted facilitator, ensuring a smooth transition of your belongings. Here’s the breakdown:

  • Nomination – A Legal Trust: When you designate a nominee in your mutual fund application, you’re creating a legal trust. Your chosen nominee becomes a trustee, holding the units on behalf of your legal heirs.
  • Not Ownership, But Responsibility: Nominating someone doesn’t transfer ownership of your funds. The nominee simply holds the units until the rightful legal heirs are identified.
  • Legal Heirs Defined by Law: These heirs are determined by your will (if you have one) or by the applicable succession laws in your region. Once identified, the nominee has a legal obligation to transfer the units to them.

Think of a nominee as a temporary custodian. They bridge the gap between your passing and the legal identification of your beneficiaries.

Nominee vs Legal Heir

A nominee is chosen to receive your assets in case of your death. It is one of the most critical information required when applying for any investment, including mutual funds, stocks, or other instruments. On the flip side, a legal heir is the close relative of the deceased who legally owns certain rights to inherit the assets and property of the investors, subject to the laws.

We have differentiated both concepts in a simplified way below to give you a better understanding of both:

FeatureNomineeLegal Heir
RoleTrusted facilitatorInheritor
ResponsibilityReceives the mutual fund units first and holds them in trust.Ultimately inherits the mutual fund units as per your will or succession laws.
OwnershipDoes not become the owner of the units.Becomes the legal owner of the units.
SelectionChosen by you in the mutual fund application form.Determined by your will or by succession laws if no will exists.
Nominee vs Legal Heir

Who Gets Your Mutual Funds When You Die

In India, when you die, your mutual funds go to your legal heirs as defined by the Indian Succession Act, 1925, or other applicable laws based on your religion or community. However, you can appoint a nominee in your mutual fund application. This nominee acts as a trustee, receiving the units first and holding them in trust until the legal heirs are identified.

Here are two major frameworks according to which the property is distributed as per the law:

  • The Indian Succession Act, 1925: This act outlines the order of inheritance for different categories of heirs like spouses, children, parents, and siblings.
  • Other Applicable Laws:  In some cases, religious laws specific to your community might supersede the Succession Act.

Critical Review

The major motive here is to inform you that nominating someone doesn’t grant them ownership of your mutual funds. They simply act as a trusted custodian to ensure a smoother transition for your legal heirs. This helps:

  • Reduce Delays: Having a nominee streamlines the initial claim process, potentially speeding up the time it takes for legal heirs to receive their inheritance.
  • Prevent Disputes: A clear understanding of nominees and legal heirs helps avoid confusion or conflicts among beneficiaries.

Keep in mind that the same will happen when discussing fixed deposit nominee vs legal heir or nominee vs legal heir in bank account.

Conclusion

Understanding the distinction between nominee vs legal heir is crucial for proper financial planning in India. Consider both aspects, i.e., appointing a nominee and potentially creating a will. This helps ensure your mutual funds reach your intended receipts and give you peace of mind.

FAQs

How Can Legal Heirs Claim Money From Nominees?

The transferring process is quite simple if your bank account has a registered nominee. What you would need is to carry a death certificate and your ID proof

What is the claim process for nominees and joint holders?

In order to claim the mutual funds of any deceased, one needs to submit specific documents to show whether the nominee is a joint holder or legal heir. Here is what will be needed:  
– Transmission Request Form
– Notarized Death Certificate
– KYC Documents: PAN Card, Aadhar Card, etc.
– Bank Statement or cancelled cheques

What are the tax implications on the mutual fund investment when you die?

Here are the categories of the tax implication:
– No Capital Gain Tax: No capital gain tax is implied if the claimant opts to transfer the units. 
– Subsequent Transaction: Any financial gains from trading mutual funds units, including dividends or redemption, must be taxed per the income tax guidelines. 
Remember to consult with a tax advisor to know what are the tax implications in case of any future transactions of financial investments in detail according to your financial standpoint.