Experts call it a long overdue structural correction, but warn the fix is procedural and will be tested in implementation and legal alignment across statutes. Mint explains:
What is the TLH code meant to address?
Transfers of securities to heirs are often misclassified as taxable sales despite the Income Tax Act, 1961 explicitly exempting them, said Prateek Bansal, partner at White and Brief Advocates and Solicitors.
As a result, the nominee in such transfers, who is merely a trustee, is wrongly assessed for capital gains on assets they never beneficially owned, he said.
“The erroneous taxation of nominees and their heirs arises from inconsistent reporting by RTAs (registrar and transfer agents) and depositories,” said Bansal.
Per Sebi’s draft circular, registrars, depositories, and other intermediaries have to tag transfers of securities to heirs with a standard TLH code while reporting to the Central Board of Direct Taxes (CBDT), so such transmissions are not mistaken as taxable sales.
Stakeholders will have three months from the circular’s issuance to integrate the changes, according to the consultation paper.
Why does such misclassification happen?
The flaw stems from the gap between the legal position and operational reporting.
Clause (iii) of Section 47 of the Income Tax Act treats inheritance transmissions as non-taxable. Yet, in practice, automated systems, RTAs, and depository participants log these transfers as sales.
Under Indian market practice, a nominee only facilitates swift transfer of securities after a holder’s death and will not have beneficial title; heirs under a will or succession law ultimately own the assets.
The absence of a standard code allowed for such transmission of securities to be interpreted as a commercial transfer, triggering capital gains provisions against nominees.
“In the absence of a standardised mechanism to distinguish a testamentary or succession-based transmission of securities from a commercial transfer, depositories and intermediaries frequently recorded such movements in the nature of sales,” said Tushar Kumar, advocate, Delhi High Court.
This, he added, automatically attracted capital gains tax, creating undue hardship.
What changes under the TLH code?
Sebi’s ‘Transmission to Legal Heirs’ code is designed as aclean, uniform flag across registrars, depositories, listed issuers, and depository participants, feeding CBDT with the correct code so records reflect inheritance rather than disposal.
Procedural steps for transmission remain under existing regulations, including Listing Obligations and Disclosure Requirements (LODR) and the master circular framework for RTAs; only the reporting tag changes to align tax treatment with the statute.
Will the TLH code fix the issue?
Experts see immediate relief but persistence of structural questions.
“The TLH code is a significant procedural improvement, but it’s essentially a bandaid on a deeper systemic issue,” said Bansal of White and Brief Advocates and Solicitors, pointing to unresolved ambiguities in the nominee’s role under the Companies Act, the Depositories Act, and the Income Tax Act.
He expects fewer erroneous assessments but anticipates disputes to continue without broader legal clarifications.
Dipesh Jain, partner at Economic Laws Practice, said Sebi’s proposal addresses a critical lacuna: transmissions reflected under a nominee’s PAN often appear as third-party transfers and get taxed.
“Since the TLH code is untested but directed at resolving this lacuna there should be relief expected,” he said, adding that the resolution could be gradual as systems and protocols stabilize.
Compliance remains the near-term hurdle.
“Compliance may pose short-term challenges, with RTAs, depositories, and issuers needing to update systems and train staff within 3 months. Long-term, it should streamline processes and reduce disputes,” Bansal said.
What more needs to happen?
Kumar, the Delhi High Court advocate, suggested additional CBDT frameworks to give heirs a robust shield during assessments and ensure end-to-end data recognition of TLH-tagged transmissions.
“The efficacy depends on seamless integration across systems, strict adherence by intermediaries, and alignment with the Central Board of Direct Taxes’ own data recognition protocols,” he said.
S. Sriram, executive partner at Lakshmikumaran and Sridharan law firm, said the TLH code “reduces the chances of unwarranted additions but would not permanently resolve the issue”.
He suggested a statutory reporting system for all transmissions, by will or intestate, not only nominee-to-heir flows, but flagged the operational burden of verifying claims.
Are there other red flags?
Operationally, the TLH tag may increase diligence by reporting entities in verifying heirship, making depositories and depositary participants more cautious if multiple heirs or contests are involved.
That could slow some transmissions in the interim, even while reducing the tax misclassification risk.
Also, risk of misuse is not nil, experts warned.
Kumar flagged “the possibility of misuse where genuine taxable transfers could be disguised as inheritance transmissions to evade tax, necessitating heightened scrutiny and stronger audit trails”.
What does the TLH code mean for families?
For households, the broad takeaway is to professionalise estate planning.
“Rather than reactive succession planning, families and financial planners must prioritise proactive succession planning, ensuring clear nominations and their documentation are updated regularly,” Bansal urged, underscoring the centrality of a well-drafted will.
“It would be advisable to record the succession in the form of a will and have it registered. This would resolve a large part of problems that practically arise,” Sriram added, pointing to practical benefits when depositories and RTAs need to validate claims in contested cases.
Once the TLH code is in place, some families may be more comfortable appointing third-party nominees distinct from legal heirs. But until the code’s performance is proven, Jain of Economic Laws Practice advised treading with caution.
