Nominee
Also written Nominee (insurance) · Nomination
The person you name to receive custody of your money or securities when you die — a custodian who must pass the asset to the legal heirs, not the owner of it.
In plain language
A nomination is a name you write on a form so that, when you die, the bank or the depository or the mutual fund knows whom to hand the money to without waiting for a court.
What it does not do is decide who owns that money. The workbook is unusually blunt about this: a nominee is only a custodian of the asset owner's money and doesn't have any ownership rights. The nominee collects; the legal heirs inherit. Where the two are the same people, nobody notices the distinction. Where they are not, it is the whole story.
In the securities market, nomination is the facility that enables an individual investor to nominate a person, who can claim the securities held by him or her in their demat accounts, or the redemption proceeds thereof in respect of mutual fund units, in the event of death of the investor.
How it works
You name the nominee when you open the account, and you can change it later. It costs nothing.
The workbook's guidance:
- Nomination for a demat account is not mandatory, but advisable — it alleviates the problems faced by legal heirs in case of death of account holder.
- The Do's and Don'ts annexure says to avail the nomination facility for all your investments, and that multiple nominations are allowed in a demat account.
- In the absence of nomination, it could be expensive and time consuming for the legal heirs of the deceased to get their money.
Without a nomination, the heirs must approach every bank, depository, mutual fund and insurer separately, presenting a death certificate along with a legal heir's certificate. With a Will, the assets are distributed as the Will says; in the absence of a Will, transfer is made only to legal heirs under the applicable personal law.
A worked example
The workbook's example, with rupees attached. Suresh places Rs 6,00,000 in a bank fixed deposit and nominates his friend Ramesh. Suresh dies; the FD is worth Rs 6,72,000 with interest.
The bank pays Rs 6,72,000 to Ramesh, because Ramesh is the registered nominee. That is the bank discharged.
Ramesh is now holding money that is not his. He needs to subsequently transfer the entire amount to Suresh's legal heirs; otherwise his heirs will need to claim the amount in the court of Law.
Set against that, the cost of having named nobody. Suresh's widow would have had to obtain a legal heir's certificate and approach the bank, the depository, two mutual funds and the insurer one by one. In practice that is several months and, with legal fees, commonly tens of thousands of rupees — against a form that took ninety seconds at account opening.
The correct arrangement was available and free: nominate his wife, so that custody and inheritance land on the same person.
Why NISM asks about it
Chapter 7 (Pension, Retirement and Estate Planning) defines the nominee as a custodian without ownership rights and gives the Suresh-and-Ramesh example; Chapter 5 covers the nomination facility for demat accounts; Chapter 6 uses "nominee" for the recipient of a life insurance sum assured. The examinable line is custodian, not owner — and the pair of facts that nomination in a demat account is not mandatory but advisable and that multiple nominations are allowed.
Common exam traps
- Nominee is not the same as legal heir. The nominee receives custody; the heirs receive ownership. This is the single most asked point in the chapter.
- A nomination does not override a Will. The Will decides distribution; the nomination only decides who collects.
- Not mandatory for a demat account, but advisable. An option saying nomination is compulsory is wrong.
- Multiple nominations are allowed in a demat account — do not answer "only one".
- A nominee is not a power of attorney. A PoA acts while you are alive; a nomination operates only on death.
- Nominate on every account separately. A nomination on your bank account does nothing for your demat account or your mutual funds.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Power of AttorneyA legal document by which you authorise somebody else — often your stock broker or depository participant — to operate your demat and bank account on your behalf. It is optional, and revocable.
- Estate planningDeciding during your lifetime who is to receive which of your assets after your death, and documenting it — mainly through a Will and nominations — so heirs can claim them easily and cheaply.
- Succession certificateA certificate issued by a District Court under the Indian Succession Act, 1925 authorising the legal heirs of someone who died without a Will to collect the deceased's debts and securities.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- WillA written legal declaration of how a person wants their assets distributed after death. Registration is not compulsory but preferable; without a Will, assets pass under personal laws.
- Transmission of unitsThe transfer of mutual fund units after a unit holder dies — to the surviving joint holder, the registered nominee or a legal heir — with documents that depend on who claims and how much is at stake.
- Power of Attorney holderThe person authorised to operate a mutual fund folio on an investor's behalf under a Power of Attorney — able to transact freely, but barred from making or changing the folio's nomination.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
- Beneficial nomineeA life insurance nominee who is a parent, spouse or child of the policyholder — entitled to keep the claim money in their own right instead of holding it in trust for the legal heirs.
- Legal heir certificateA certificate issued by the Tehsildar identifying the living heirs of a deceased person, used for claims such as pension, provident fund and gratuity where no nominee exists.
- Special power of attorneyA power of attorney that gives the agent only limited powers, such as carrying out one specific transaction. SEBI guidelines allow a specific PoA to a broker or DP, never a general one.
- Whole life insuranceA type of life insurance policy that stays active for as long as you keep paying the premiums, rather than for a fixed term like term insurance.
- Legal heirThe person entitled by law to a deceased person's estate — distinct from a nominee, who only holds the money in trust until it reaches the rightful heirs.
- Sum assuredThe amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
- IntestateDying without making a will. The property then passes to heirs under the succession law that applies to the person, which may not be what they intended.
- POA registrationRegistering a power of attorney with the authorities — mandatory only where it creates an interest in immovable property, and valuable otherwise because a registered POA cannot easily be challenged later.
- Joint holdingProperty held by more than one person and accessed by them subject to the mode of operation, used as a simple way to let a spouse or child reach an asset without waiting for succession.
- LegateeThe person named in a Will to receive a portion of the deceased person's estate, as distinct from the executor, who is named to administer it.
- Living WillAn advance directive written primarily for physicians, stating a person's wishes for end-of-life care in situations where they are unable to communicate their decisions.