Sebi’s TLH Code: A Tax Relief Breakthrough for Inherited Securities

In a landmark move aimed at resolving long-standing tax ambiguities, the Securities and Exchange Board of India (Sebi) has proposed a new reporting mechanism for inherited securities. The introduction of the TLH code—Transmission to Legal Heir—is designed to ensure that transfers of securities due to inheritance are correctly classified in tax records, preventing wrongful capital gains assessments. This procedural update could significantly ease the compliance burden for nominees and legal heirs, aligning financial reporting with the provisions of the Income Tax Act.

Key highlights from Sebi’s proposal  
- TLH stands for Transmission to Legal Heir, a new reason code for reporting inherited securities  
- The code will be used by brokers, depositories, and registrars when transmitting securities to heirs  
- It aims to prevent misclassification of inherited assets as taxable sales  
- The move aligns with Section 47(iii) of the Income Tax Act, which exempts inherited securities from capital gains tax  
- Public feedback on the proposal is open until September 2, 2025

Why the TLH code matters  
Inherited securities have long been a grey area in tax reporting. In the absence of a standardized classification, such transfers were often tagged as routine sales, triggering capital gains tax for recipients who never purchased the assets. This misclassification not only led to undue tax liabilities but also created confusion for nominees and legal heirs navigating succession.

1. Legal clarity  
   - The Income Tax Act explicitly exempts inherited securities from capital gains tax  
   - However, automated reporting systems often failed to distinguish these from regular transactions  
   - The TLH code provides a clear tag that flags such transfers as non-taxable

2. Procedural consistency  
   - Registrars and depositories will now have a uniform method to report inheritance-based transfers  
   - This ensures consistency across platforms and reduces the risk of erroneous tax notices  
   - The code will be integrated into existing systems without altering the core transmission process

3. Relief for nominees  
   - Nominees often faced tax assessments on assets they did not beneficially own  
   - The TLH code ensures that the true legal heir is recognized, and the transfer is treated appropriately  
   - This protects families from financial and legal stress during succession

Implementation roadmap  
- Sebi has issued a consultation paper outlining the TLH code and its intended use  
- Stakeholders including brokers, investors, and legal professionals are invited to submit feedback  
- Once finalized, intermediaries will have three months to integrate the code into their systems  
- Training and system upgrades will be required to ensure smooth adoption

Challenges and considerations  
- Experts caution that while the TLH code is a step forward, its success depends on proper implementation  
- Registrars and depositories must update backend systems and train staff to apply the code correctly  
- Coordination with the Central Board of Direct Taxes (CBDT) will be crucial to ensure tax authorities recognize the new classification  
- Legal consistency across statutes, including succession laws and nominee rights, must be maintained

Broader implications for investors  
- The TLH code could pave the way for similar reforms in other asset classes, including mutual funds and bonds  
- It reinforces the importance of proper nomination and succession planning  
- Investors are advised to review their demat accounts and ensure nominations are updated to avoid future complications

Conclusion  
Sebi’s TLH code is more than a technical fix—it’s a structural correction that brings clarity, fairness, and compliance to the transmission of inherited securities. By aligning reporting practices with legal provisions, it protects heirs from undue tax burdens and simplifies succession. As stakeholders weigh in and systems adapt, the TLH code could become a cornerstone of investor-friendly reform in India’s financial ecosystem.

Sources: Taxmann, AlgoFinder
 

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