The bill, passed by the Lok Sabha on 3 December, says that nominees are only custodians and safekeepers representing the beneficiaries (if there is a testamentary document, e.g., Will/Trust deed) and heirs (in the absence of a testamentary document). They are not owners. However, nomination is important as it aids the process of inheritance.
Rajat Dutta, founder of Inheritance Needs, said this change is aimed at providing opportunities to family members of the deceased to ensure ease in the claim process and thereby reduce unclaimed amounts lying with banks.
Mint examines how the new bill compares to previous regulations and its benefits.
Existing regulations
The existing rules allow savings bank account and fixed deposit holders to register only one nominee. However, people could have two nominees in the case of a jointly held vault (locker).
The amendment addresses the issue of such unclaimed funds in the Indian banking system. “Managing unclaimed money is a burden on the financial system. The amendment will curb the asset flow to the DEAF and ensure they reach the family of the deceased (heirs or beneficiaries),” Dutta said.
For example, earlier Mr A could register only one nominee for his savings account, fixed deposits or recurring deposits. If he nominated his spouse as the sole nominee, she would receive the funds upon his demise. However, if his spouse predeceased him, the nomination would become invalid.
If Mr A had a Will, the claimant would need to prove its legitimacy. In the absence of a Will, the court would identify the heirs and their individual shares.
In case of no claim or resolution, Mr A’s assets would move to the Reserve Bank of India’s (RBI’s) Depositor Education and Awareness Fund (DEAF). The fund, established in 2014, houses unclaimed balances from accounts inactive for over 10 years.
The proposed changes
The new rules allow up to four nominees for bank accounts and fixed deposits, with two distinct options: Joint nomination and successive nomination.
Joint nomination: This option enables account holders to assign a specific percentage of entitlement to each nominee (up to four). If no percentage is specified, shares are presumed to be equal. For example, if Mr A nominates his mother, wife, son and daughter, he can allocate specific ratios such as 50:30:10:10.
On his demise, the bank will disburse nominees their respective shares. If his mother is deceased, then her share of 50% will be distributed to his spouse, his son, and his daughter in the ratio of 30:10:10. Thus, the derived distribution to be followed by the bank among surviving nominees would be: Wife 40%, son 30%, and daughter 30%.
Successive nomination: This provides a clear chain among nominees. The first nominee inherits 100% of the assets. If the first nominee is no longer alive, the second nominee gets priority, followed by the third, and so on. This also aids in easing the cash flow requirements of the bereaved family pending implementation of the Will or the resolution as per the succession law.
“Although a Will overrides nominations, the new rules ensure quicker access to funds for the bereaved family,” Dutta said, adding that the amendment is a “boon for the struggling elderly”.
Take, for example, the case of Mr B, a senior citizen who is under elderly care and his only daughter is married and settled overseas. As of now, Mr B has named his daughter the sole nominee. The new amendment gives Mr B the flexibility to name his caretaker a joint nominee at 5% and his daughter at 95%. With this, Mr B is securing himself against any possible malpractice upon his demise.
The importance of testamentary documents
While the amendments empower account holders with robust nomination options, Wills remain the ultimate document of authority. As Dutta explained, “Nominees are not owners but custodians of the heirs or beneficiaries.”
If a Will specifies a beneficiary different from the nominee, the nominee is legally bound to transfer the assets to the Will’s beneficiary.
For instance, if Mr A names his caretaker as the nominee for his bank account but specifies in his Will that the funds should go to his son, the caretaker is legally obligated to transfer the funds to the son as per the Will.
If the nominee fails to hand over the assets, the heirs can seek legal recourse to claim their rightful inheritance.
In cases where no Will exists, the inheritance will follow the applicable succession laws.
Need for uniform nomination rules
Dutta pointed out the importance of adopting uniform nomination rules across all financial products like bank products, mutual funds, life insurance policies, and demat accounts.
He said a standardized approach to nominations would simplify the inheritance processes, making it easier for heirs to claim assets while also reducing the administrative burden on each of the counterparties, i.e., banks, asset management companies, insurance companies, etc.
Currently, the rules governing nominations vary depending on the type of financial product. For example, mutual funds and life insurance policies typically allow up to three nominees, with the option to assign specific percentage shares. Similarly, demat accounts follow a three-nominee rule with customizable allocations. These differing frameworks can create confusion for heirs managing multiple financial assets.
Take the case of Mr. A, who holds a bank account, mutual funds, and a life insurance policy. If he registers four nominees for his bank account under the new amendment, two for his mutual funds with equal shares, and three for his life insurance policy with specified percentages, his heirs might face difficulties navigating these inconsistencies. Each product would require different processes and documentation for inheritance claims, increasing the likelihood of disputes and delays.
According to Dutta, a uniform nomination system would address these challenges. For instance, allowing up to four nominees for all financial products, with the option to specify percentage distributions or a successive chain, would make the process more efficient.