A conundrum revolving around the transfer of ownership of properties to the nominees or legal heirs/successors is attempted to be addressed in this Article.
A general understanding of individuals is that naming a nominee for bank deposits, securities, insurance policies, provident fund accounts, gratuities, etc., will automatically grant the nominee absolute ownership of the same after their demise. However, numerous court decisions have held that a nominee is often merely a trustee who holds the asset on behalf of the legal heirs under the relevant succession laws.
In many cases, the nomination form is filled at the inception of a relationship with the institution, such as at the time of commencement of employment in case of gratuity or employment-linked benefits, or procurement of any insurance policy issuance, etc., and is rarely revisited later.
It is essential to understand that while naming a nominee ensures smoother disbursal of assets upon the account holder’s death, it does not confer ownership rights, unless explicitly provided under the succession laws or supported by a testamentary document such as a Will. Therefore, nominations must be treated as a mechanism for facilitation, not succession, and should be regularly updated to reflect the individual’s current family and legal situation. Neglecting to do so may also cause emotional and financial distress for the surviving dependents.
Nomination: Only a Mode of Collection
The Supreme Court, in Sarbati Devi v. Usha Devi, 1984 SCR (1) 992, held that a nominee under Section 39 of the Insurance Act, 1938 (“Insurance Act”) does not override the rights of legal heirs. The nominee merely receives the amount for distribution in accordance with the relevant succession laws.
In Nozer Gustad Commissariat v. Central Bank of India, 1992 SCC OnLine Bom 481, the Bombay High Court ruled that a nominee under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) cannot be a non-family member and held such nomination to be invalid.
The Andhra Pradesh High Court in Shaik Dawood and Ors. v. Mahamood Begum and Ors. [1987] 61 COMPCAS 452 (AP) held that the nominee of a provident fund has only the exclusive right to receive the fund, but his rights are the same as those of a nominee under section 39 of the Insurance Act, and amounts are held for distribution amongst the heirs in accordance with their personal laws.
Similarly, the Supreme Court in Vishin N. Khanchandani v. Vidya Lachmandas Khanchandani (2000) 6 SCC 724 ruled in the context of government savings certificates that a nominee is entitled to receive the sum due on the savings certificate only for the purpose of distribution under the relevant succession laws.
Recently, the Apex Court put a quietus to the issue in Shakti Yezdani & Anr. v. Jayanand Jayant Salgaonkar & Ors. 2023 SCC Online SC 1679 and reinforced the principle in the context of company shares, clarifying that nomination under Section 72 of the Companies Act, 2013, does not confer beneficial ownership; the property ultimately devolves as per personal succession laws.
The Insurance (Amendment) Act, 2015: Did It Change Anything by introducing “Beneficial Nominee”?
An amendment to Section 39 of the Insurance Act, 1938, introduced the concept of a "beneficial nominee." Specifically, if the nominee is the policyholder’s spouse, parents, or children, they are deemed to hold a "beneficial interest" in the proceeds under Section 39(7). However, there are conflicting decisions by various High Courts on the beneficial nominee under Section 39.
The Andhra Pradesh High Court, in Mallela Manimala v. Mallela Lakshmi Padmavathi (2023 SCC OnLine AP 459), interpreted Section 39(7) to mean that such close family nominees receive the amount absolutely, excluding legal heirs. A similar view was taken by the Rajasthan High Court, as well.
In contrast, the Karnataka High Court, in Smt. Neelavva v. Smt. Chandravva and Others [2025] 172 taxmann.com 107 (Karnataka), rejected this approach. The Court held that even after the 2015 amendment, nomination does not override succession laws. The Court carefully analyzed the legislative background, including recommendations by the Law Commission (190th Report), and concluded that there was no intention to create a “third mode of succession” in addition to testamentary succession and non-testamentary succession. In this case, a man had nominated his mother as his nominee when unmarried. After his marriage and the birth of a son, he did not update the nomination. On his death, his wife and minor son, both Class I heirs, claimed rights over the insurance proceeds. The Karnataka High Court ultimately ruled that all Class I heirs, including the mother, wife, and son, were entitled to equal shares, firmly reiterating that nomination under the insurance policies does not confer ownership but merely facilitates collection.
Conclusion: Clarity Over Convenience
While nomination is convenient for asset management after death, it is not a tool to override inheritance laws. Whether it is under the Insurance Act, EPF Act, Companies Act, Gratuity Act, or banking law provisions, Indian courts have consistently emphasized that the rights of legal heirs prevail unless there is a valid Will stating otherwise. The recent Karnataka High Court decision is yet another reminder.
To avoid disputes amongst the surviving dependents, individuals can settle their properties by executing a Will or any other documents, which serve as the definitive expression of a person’s wishes regarding the distribution of their assets after death and take precedence over nominations.
Unlike a nomination, which merely facilitates the transfer of property into the hands of a temporary custodian, a Will legally determines who ultimately inherits the property. By explicitly specifying beneficiaries and the manner of distribution, a Will helps avoid ambiguity and minimizes the potential for family disputes. Moreover, a properly drafted Will can address all assets comprehensively, including movable and immovable properties, investments, and personal belongings, ensuring that no aspect of one’s estate is left to chance. Therefore, to achieve complete and effective estate planning, it is recommended to prepare and regularly update their Will in addition to managing nominations from time to time.
Equally important is actively reviewing and updating nominations in all financial instruments such as life insurance policies, provident fund accounts, bank accounts, shares, and even gratuity benefits, especially after significant life events like marriage, the birth of children, divorce, or the death of an existing nominee.
Failing to update these crucial details can lead to unintended consequences, including legal disputes amongst the surviving family members, delays in asset distribution, and financial hardship for the surviving dependents. Therefore, it is essential to treat nominations as a dynamic part of one’s estate planning strategy, to be periodically reviewed and updated. Ultimately, proactive planning today ensures peace of mind tomorrow for the legal heirs.
Authors Profile:
Dinesh Babu Eedi- Dinesh Babu Eedi has over 20 years of experience in handling corporate, commercial and insolvency matters at courts of first instance, civil courts, high court, appellate courts, tribunals and in arbitrations. In addition to the litigation, Dinesh also provides advisory on regulatory compliances, structuring commercial transactions, conducting due diligence of companies, real estate due diligence and audit on compliances of labour legislations. He also drafts and reviews various transaction documents, legal opinions, agreements on various commercial matters, and advises on family succession and Wills.
Kumar Panda- Kumar Panda is part of the General Corporate Advisory practice and regularly advises clients on transaction structuring, documentation, and exchange control requirements. He also advises clients on applicability of labour regulations and compliance, providing guidance on employment termination, deployment of workforce through third parties, structuring of employee benefit schemes like ESOPs. His clients span across sectors like Information Technology, Media & Entertainment, Agriculture, Pharma, and Fintech.