This is one of the most consequential misunderstandings in Indian personal finance, and it causes a large share of family disputes after a death.
What a nomination does
A nomination gives the bank, insurer, company or depository a valid discharge. It tells the institution whom it may safely pay, so that it is not caught between competing claimants. It is a mechanism of convenience for the institution.
What it does not do
It does not, by itself, transfer ownership. The settled position across a long line of authority is that the nominee receives the asset as a trustee for the legal heirs, who take it according to the will, or if there is none, the applicable law of succession. In Shakti Yezdani v. Jayanand Jayant Salgaonkar (2023) the Supreme Court confirmed this for company shares, holding that the nomination provisions of the Companies Act do not override succession law.
Under Section 39 of the Insurance Act, 1938, where the policyholder nominates a parent, spouse or child, that nominee is a beneficial nominee and holds the money beneficially rather than as a trustee. That carve-out applies to life insurance and to those categories of relatives. It does not extend to bank deposits, mutual funds, shares or property.
Where nomination genuinely matters
- Speed. A nominee can collect the funds quickly without a succession certificate, which matters when the family needs money immediately after a death.
- Provident fund, where the statutory scheme gives the nomination greater effect.
- It avoids the asset being frozen while heirs argue.
What to do
- Keep nominations updated on every account, policy, demat and provident fund, so someone can access the money quickly.
- Also make a will, and make sure it does not contradict the nominations. Where they conflict, the will governs ownership and the family ends up in court to establish that.
- If you intend the nominee to keep the asset, say so expressly in the will. That removes the argument entirely.