Archaic nomination laws in 21st century India: The need to recast and the way forward

When an employee dies intestate (without a valid will), distribution of his/her entitlements such as gratuity, amounts in their provident fund account, insurance, etc. is first determined by any valid nominations that the employee has made.

If an employee has not made a nomination, his legal heirs must obtain an heirship certificate from a court before collecting any of the benefits, which is a tedious process and can take well over a year. In some instances, with issues such as inter-familial disputes, the heirs may never obtain the heirship certificate, and consequently, the entitlements. This is why various regulators and courts have emphasized the importance of nominations, to ensure that the process of transfer of benefits owed to the legal heir of a deceased employee is smooth.

Despite its vital role, the process of nomination under various beneficial legislation is outdated, archaic, and runs counter to present world realities. Moreover, it completely ignores an employee’s autonomy by curtailing his right to choose the custodian (or beneficiary) of his properties. We have set out below some of the restrictions and procedural drawbacks that plague the law around nominations.

Restriction on persons in favour of whom nominations can be made

The Employees’ Provident Funds Scheme, 1952 (Scheme), the Payment of Gratuity Act, 1972 (Gratuity Act), the Payment of Wages Act, 1936 (PW Act) and the new, yet to be enforced Code on Social Security (SS Code) mandate that the nominee should always be a member of the employee’s ‘family’ if the employee has a ‘family’ at the time of making nomination.

Under such legislation (barring minor differences), ‘family’ is defined as an employee’s spouse, their children, their parents and parents of their spouse, their widow and children of the employee’s deceased son, if any. Further, the draft Central Rules published under the SS Code do not recognize dependent parents whose income exceeds ₹9,000 per month as ‘family’.

If an employee has a ‘family’ and he nominates a person other than a ‘family’ member, such nomination will be invalid. This leads to nominations made in favour of the employee’s brother, sister or another significant person being invalid. Even in a situation where an employee is estranged from his ‘family’, he is restricted by law to only nominate ‘family’. This not only greatly curtails an employee’s autonomy but also reflects a lack of recognition of alternate forms of family, such as live-in relationships, or same-sex relationships.

Certain portions of the ‘family’ itself are discriminatory. For instance, for a female employee, the husband’s dependent parents are family. However, for a male member, the wife’s dependent parents are not included in the definition of family. Another instance is that under the Scheme, a deceased son’s widow and children are family, but a deceased daughter’s widower and children are not.

No provision for recognition of nominations made by transgender employees

The Scheme and the Gratuity Act use the terms ‘male member/employee’ and ‘female member/employee’. By restricting the nominations to ‘family’ and providing a cis-gendered definition of ‘family’, transgender persons are entirely excluded from the nomination process.

This also shows a complete ignorance of the Transgender Persons (Protection of Rights) Act, 2019, which calls for non-discrimination of transgender persons in connection with employment or welfare schemes. Considering that ‘transgender’ is recognized as a separate gender, the law must also be cognizant of their socio-political circumstances and recognize their right to nominate a person of their choice.

That said, at least one of these problems is resolved by the SS Code, which does not define ‘family’ based on the gender of an employee. It, however, still retains the definition itself, which is problematic.

Nomination of an employee is required to be revised and resubmitted post marriage

Currently, the Scheme and the Payment of Wages (Nomination) Rules, 2009 that is applicable for airlines, mines etc. requires a fresh nomination to be made by a member upon marriage and the nomination made before marriage becomes invalid.

Rather, an employee should be able to nominate the person of his choice, which he can choose to update later on. By invalidating the previous nomination, if an employee has failed to update his nomination after acquiring ‘family’ or after marriage, and has passed away, his legal heirs would have to bear the brunt of a long-drawn process to obtain the benefits.

Beneficial ownership right of nominees

Under the employment laws, nominees are by default regarded as trustees or custodians, However, a choice should be provided to employee at the time of nomination, to decide whether such nominee would be a ‘collector nominee’ or a ‘beneficial nominee’.

This would permit employees to nominate their lawyers, or wealth managers as collector nominees, or nominate their family as legal and beneficial owners of his entitlements. Such a measure has already been specified for life insurance policies under Section 39(7) of the Insurance Act, 1938.

Apart from curtailing an employee’s autonomy, the present process of nomination also features several procedural drawbacks.

Enabling e-nomination facility for employees to make nominations

Presently, banks allow making nominations to deposits or bank accounts online. Further, the law even permits conclusion of contracts online. However, despite its obvious advantages, the ability to update or file nomination forms online has not been widely implemented under beneficial legislation. In fact, the Employees’ Provident Fund Organisation implemented e-nomination facilities only in 2019.

No facility to specify successive nominations to address situations of earlier demise of the first nominee(s)

Presently, if a nominee predeceases the employee, the nomination to such extent is automatically cancelled and the employee has to make a fresh nomination. If the employee fails to make a fresh nomination, there would be no valid nomination, placing his legal heirs in a difficult position. Instead, a tiered process of successive nominations must be implemented, whereby an alternate nominee is specified in case of death of a nominee.

A similar system already exists under the Provident Fund Act, 1925. This considerably smoothens the transmission process and simplifies inheritance by side-stepping the need for judicial reference.

Nominations under the Insurance Act, 1938

Considering the substantive and procedural issues highlighted above, it is relevant to look at the Insurance Act, where these have largely been addressed.

Under Section 39 of the Insurance Act, nominations are not restricted to a policy holder’s family, nor does the policy holder have to change his nomination upon marriage or upon acquiring any family.

That said, there has been a lot of debate as to whether a nominee under Section 39 of the Insurance Act is afforded a beneficial entitlement to the insured amount, or a mere custodial right. Prior to 2015, the Insurance Act was silent on whether nominees would be afforded beneficial ownership of the insured amount. As a result, several courts in India held that nominees would not be conferred a beneficial right under Section 39 of the Insurance Act. The leading judgment on this point was that of the Supreme Court in Sarabati Devi v. Usha Devi (1984), where it was held that a mere nomination effected under Section 39 does not deprive the heirs of their rights in the amount payable under a life insurance policy.

This issue was also taken note of by the Law Commission in its 190^th Report in June 2004, where it was recommended that a clear distinction be drawn in the Insurance Act between a collector nominee and a beneficial nominee, and that a choice be given to the policy holder to specify whether he would like for the nominee to be a collector nominee or a beneficial nominee.

These recommendations were partially taken into account and Section 39 was amended in 2015 by way of the Insurance (Amendment) Act, 2015. The amended Section 39 is clear in its position that a nominee under the Insurance Act enjoys a position of beneficial nominee, rather than collector nominee. Vitally, the autonomy of the individual is still restricted as he cannot specify whether a nominee is a mere custodian or not.

That said, it is important to note that several High Courts in India continue to insist on the Sarabati Devi position despite the 2015 Amendment. Most recently, the Supreme Court in Shreya Vidyarthi v. Ashok Vidyarthi (2015) relied upon the Sarabati Devi judgment and held that nominee under the Insurance Act would not be granted a beneficial right. However, despite the judgment having been rendered after the 2015 Amendment, the same was not brought to the Supreme Court’s attention and did not form part of its reasoning.

Only in 2021, the High Court of Delhi in Shweta Singh Huria v. Santosh Huria, 2021 overturned the ruling of a trial court that a nominee was merely a custodian and not the beneficial owner of the insurance amount.

With the advent of the Labour Codes and the ongoing litigation surrounding legalizing same-sex marriages in India, it is vital that the legislature makes efforts now to address the pitfalls of nominations under beneficial legislation as highlighted above and adopts a forward-thinking approach, in line with the Insurance Act. This would grant employees with the autonomy to make active choices and plan for unforeseen events and greatly benefit a deceased employee’s legal heirs by easing the process.

Anirudh Krishnaa is a lawyer practicing employment law.