Nominee vs Legal Heir in India: Why Your Bank Nominations Might Not Protect Your Family
Understanding the critical difference between nominee and legal heir in Indian law. Why nominations at banks, demat accounts, and insurance companies don't equal inheritance — and what to do about it.
The ₹78,000 Crore Confusion
Every Indian who opens a bank account, demat account, mutual fund, or insurance policy is asked to name a nominee. Most people assume this means: “If something happens to me, this person gets my money.”
That assumption is wrong. And it’s costing Indian families crores.
What Is a Nominee?
A nominee under Indian law is essentially a caretaker — someone who receives the asset on behalf of the legal heirs. They are not the automatic owner.
Here’s how the Supreme Court of India has defined it:
“A nominee is only a custodian and holds the property in trust for the legal heirs.” — Sarbati Devi v. Usha Devi (1984)
And more recently:
“Nomination does not confer any beneficial interest on the nominee. It is a mere facility for convenience of the institution.” — Shakti Yezdani v. Jayanand Jayant Salgaonkar (2017)
What Is a Legal Heir?
Legal heirs are determined by succession law — these are the people who actually have the right to inherit your assets:
For Hindus, Buddhists, Jains, Sikhs
The Hindu Succession Act, 1956 (amended 2005) defines two classes of heirs:
Class I heirs (first right to inherit):
- Spouse
- Sons and daughters (including married daughters, since 2005)
- Mother
- Son/daughter of a predeceased son/daughter
Class II heirs (inherit only if no Class I heirs exist):
- Father, siblings, grandchildren, etc.
For Muslims
Muslim Personal Law has detailed fixed shares:
- Spouse gets 1/4 (if children exist) or 1/2 (if no children)
- Daughters get half the share of sons
- Parents have specific shares
For Christians and Parsis
The Indian Succession Act, 1925 applies with its own distribution rules.
Where the Confusion Hurts
Bank Accounts
When an account holder dies, the bank transfers the money to the nominee. But the nominee is legally obligated to distribute the funds to all legal heirs.
In practice: The nominee gets the money quickly, but legal heirs can (and do) sue for their share — leading to years of litigation.
Demat Accounts & Shares
Same principle. The depository (NSDL/CDSL) transfers shares to the nominee’s demat account. But the nominee holds them in trust for legal heirs.
Insurance Policies
Exception alert: Life insurance is the one area where nominations are slightly stronger.
Under the Insurance Amendment Act, 2015, if you go through the additional step of assigning the policy as a beneficial nominee, the nominee receives the proceeds beneficially and is not required to share with legal heirs.
However, most policyholders don’t know about this option, and standard nominations still follow the custodian model.
Mutual Funds
SEBI regulations treat nominations similarly to bank accounts. The nominee receives the units but holds them for legal heirs.
Real-World Disasters
Case 1: Husband’s Bank FD
Mr. Mehta had a ₹50 lakh FD with his brother as nominee (for operational convenience). When Mr. Mehta passed away, the brother received the amount. Mrs. Mehta and their two children had to go to court to recover the money. Time spent: 4 years.
Case 2: Joint Account Confusion
Mrs. Singh and her husband had a joint bank account. After his death, she assumed she owned the full balance. His children from a first marriage claimed their legal share. Result: 50% of the account went to court-directed distribution.
Case 3: Insurance But No Will
Mr. Rao had a ₹1 crore insurance policy with his wife as nominee. He also had ancestral property with no will. His siblings claimed their share of ancestral property under the Hindu Succession Act, and argued that the insurance proceeds should also be part of the estate. The case is still pending after 6 years.
What You Should Do
1. Understand That Nominations Are Not Enough
A nomination is a convenience mechanism for the bank/insurer to know who to hand the asset to. It does not replace a will or succession plan.
2. Write a Legally Valid Will
This is the single most important thing you can do:
- Two witnesses (who are not beneficiaries)
- Clearly specify who gets what
- Optional but recommended: register at the Sub-Registrar’s office
- Update after major life events (marriage, divorce, birth, death, major purchase)
3. Review All Nominations
Log into every bank account, demat account, insurance policy, and mutual fund. Check who is nominated. Ask yourself:
- Is this the person I actually want to inherit this?
- Is this consistent with my will?
- Have my life circumstances changed since I set this?
4. Consider Beneficial Nomination for Insurance
For life insurance policies, check if your insurer offers the beneficial nominee option under the 2015 amendment. This is stronger than a regular nomination and may override other claims.
5. Create a Family Asset Map
Make a single document listing every account, policy, and investment with:
- Institution name
- Account/policy number
- Nominee name
- Where to find physical documents
- Online login details (stored securely)
Share this with your spouse and/or a trusted advisor.
The Bottom Line
| Feature | Nominee | Legal Heir |
|---|---|---|
| Who decides | You (when opening account) | Law (succession act) |
| Legal status | Custodian/trustee | Actual owner |
| Can be challenged | N/A — they’re just a caretaker | Can be, but stronger legal basis |
| Distribution duty | Must distribute to legal heirs | Is the rightful recipient |
| Insurance exception | Beneficial nominee = actual recipient | Overridden by beneficial nominee |
Don’t assume your nominations are a succession plan. They’re not. Write a will, map your assets, and make sure your family knows where everything is.
This article is for educational purposes and does not constitute legal advice. For specific situations, consult a qualified legal professional or estate planner. Find verified advisors on Lineage Money.