Understand How Inheritance Of Shares Works

It is quite common for people to inherit cash, jewellery and even real estate from their family members. But inheriting such possessions is different from inheriting shares. Here is all that you need to know if your loved ones name you as a beneficiary of their shares.

What are inherited stocks?

If a loved one (parents, grandparents, spouse) passes away, the shares they owned will pass onto the beneficiary. The beneficiaries they name will become the new legal owner of the stock and thus, the stock becomes an inherited stock.

How are shares inherited?

Demat account, short for dematerialised account, is an account that allows investors to hold company shares and securities electronically. It is a digitally secure account that can make trading easy for investors. Transfer of shares is quicker and the threats of fraud and theft are also reduced. In order to open a demat account, one has to choose a depository participant (DP). You can choose any banks or stockbrokers that match your requirements. The next step is to fill the account opening form online. The form can be found on the DP’s official website. You can then enter the necessary details, fulfill the KYC norms and submit all the required documentations. After verifying the authenticity of your documents in person, you will be asked to sign copies of the agreement. The agreement usually contains all the details about your duties and rights. Once all of this is done, it will take some time to process the application and activate the account. You will then be provided with your unique login credentials. This Beneficial Owner Identification Number (BO ID) can be used to access your demat account.

One of the biggest advantages of demat accounts is that they allow the stockholders to prove ownership without the requirement of paperwork. This becomes especially helpful for older people who sometimes lose the physical share certificates that they received after buying a company’s share. This also makes it easier to pass on the shares of a deceased account holder to the nominee or legal heirs. Unlike the time in which shares were held in physical form, one would not have to approach each company to complete the process of share transmission.

Now the biggest question is “How are the shares transmitted successfully?”. To understand this, we need to understand that that there can be two cases:

1. If the single account holder passes away

If a single demat account holder leaves a nominee behind, then the procedure is uncomplicated. The nominee will be the sole beneficiary of the securities. The nominess will have to submit a notarized copy of the death certificate of the shareholder attested by a Gazetted Officer or a Notary Public. Then they have to fill up the transmission form, available at the DP website. After submission and verification, the DP will transmit the securities to the account of the nominee.

In case there is no nominee registered, then the securities will be passed on to the legal heirs as determined by a court. In that case, the transmission form and other documents have to be submitted. Furthermore, an NOC from all the legal heirs should announce no objection to transmission of the shares. In any case, the nominee or the legal heirs will be required to have a DP account.

2. If one of the joint holder pass away

In the event of the death of a share’s joint holder, the surviving holder gets to have the shares transmitted to their demat account. In order to complete the process of transmission, they need to submit a notarized copy of the death certificate of the deceased shareholder and a fully filled transmission form. Once the process is complete, the older joint account will be closed once and for all.

In some special cases where the deceased shareholder held physical share certificates, the process is a little more hectic. In that case, the beneficiaries (mentioned in wills, succession certificates etc) need to contact the Registrar and Transfer Agency (RTA) of the company whose share is being dealt with. Now, the beneficiary needs to submit the following:

  1. A notarized death certificate of the deceased shareholder
  2. Transmission or dematerialization form
  3. Original copies of the physical share certificates
  4. Self-attested photocopies of the PAN Card

Calculating Cost Basis for Inherited Stock

The cost basis for inherited stock is calculated based on its valuation on the date that the original shareholder passed away. This concept is in place so that the beneficiary cannot enjoy capital gains for a stock that they did not buy, but inherited. This valuation would indicate if the asset has actually lost or gained value. If the stock has lost value since the original shareholder bought it, then the cost basis is adjusted down to the original value of the asset at the time of the death. Similarly, the converse is also true. To take an example – let’s say that your father bought a stock for Rs. 70,000 and it was worth only Rs. 50,000 when he passed away. In that case, your basis will be Rs. 50,000. If the stock is worth Rs. 1,00,000 when you sell it, then you will be taxed on a gain of Rs. 50,000.

You can treat the shares the same way as you would if you bought them yourself. You can sell them, gift them or even hold them for as long as you want.

The biggest perk of calculating cost basis is that this saves the new shareholder from being subject to much higher taxes due to the stock growth over time. On the other hand, the obvious downside is that it can reduce the beneficiary’s capital gains due to the stock growth.

Tax provisions of inherited stock

The taxation process of inherited stock is a topic of debate. However, the current scenario is the following. If the stock of the deceased person provides dividends to the person who inherited it, they would have to pay the tax rates for Long-Term Capital Gains (LTCG). It is important to note that even if the stock is inherited for less than a year, it would still be categorized under Long-Term Capital Gains and taxed accordingly.