After the demise of an investor, the family members can benefit from the investments, once the accumulated amount is transferred to the nominee(s) or to the legal heir(s).
People make investments or take insurance covers to ensure a better future or to maintain the same standard of living after retirement or to ensure that the dreams of financially dependent family members don’t get ruined in case of unfortunate demise of the earning member of the family.
While there are many financial instruments available in the market, some are intended to transfer the risks (like insurances), some are to earn a risk-free returns (like Bonds, FDs and other small saving instruments) and some are for generating higher long-term returns (like equities, equity-oriented Mutual Fund (MF), etc).
However, after the demise of the investor, the family members can benefit from the investments, once the accumulated amount is transferred to the person(s) nominated by the investor (the nominee(s)) or to the legal heir(s). The process of such transfer is called transmission.
During the time lag between the date of death of an investor, till the death intimation is given or the death claim is made, different rules are applicable on different instruments regarding the rate of return or survival benefits payable during the period.
Rajesh Girotra, Partner, RG Capital, explains the rules applicable on different financial instruments:
Senior Citizen Savings Scheme (SCSS)
The special interest applicable on Post Office Senior Citizen Savings Scheme (SCSS) is payable only till the date of death of the investor. After that only saving interest rate is payable till the amount is transmitted to the nominee(s) or the legal heir(s). If anything extra is paid over the savings interest rate after the demise of the investor, the extra amount is recovered from the principal.
Life Insurance
On all life insurance policies with income, interest payment options, the payouts stop from the date of death of the life insured. If any payment is made after the demise of the life insured till the death intimation is given / death claim is made, the extra amount is recovered from the principal.
So, ideally this should be the first investment to be redeemed by the nominee(s) / legal heir(s).
National Savings Certificate (NSC)
If a National Savings Certificate (NSC) is broken prematurely, saving bank interest is paid instead of the higher interest payable on NSCs. To avoid this, a nominee can wait till maturity to make the claim.
However, the better option for the nominee is to get the NSCs transmitted to his/her name and redeem the Certificates on the maturity date. In this case the interest rate payable on NSC remains the same.
Public Provident Fund (PPF)
The same interest rate payable on PPF is paid till the nominee applies for redemption. If redemption is applied on the 15th of a month, the interest payable till the end of the previous month is paid only. In case of PPF, the same interest rate is payable to the nominee(s) / legal heir(s) till the money is transmitted, and not the savings account interest.
Equities, Equity-oriented MF Schemes
As no fixed interest rate or bonus rate is applicable on capital instruments like equities and MF Schemes, only the number of shares / units of MF schemes are transmitted to the nominee(s) / legal heir(s). Once the units are transmitted, the beneficiaries may redeem the investments as per their convenience. The gain or loss on investments will depend on the market price of the shares / NAV of the units on the day of redemption.
Taxation
To determine if the capital gain on redemption of equity shares / MF units is of long-term or short-term in nature, the date of investment will be taken into consideration is the original date on which the investment was made by the deceased investor and not the date of transmission of the shares / units to the nominee(s) / legal heir(s).
For fixed-income instruments, the same tax rules (as applicable on specific instruments) will be applicable on the interest earned by the nominee(s) / legal heir(s) once the instruments are transmitted.
