Locked-In Investments: When a loved one is grieved, families face not only emotional but also practical challenges. Bank accounts are often easily handled, but the real problem arises when it comes to locked-in investments.
Even when funds are available, they cannot be withdrawn immediately, leaving many families struggling for months with offices and documentation. A little information and proper preparation can significantly reduce this hassle.
What are Lock-in Investments and Why Are They Important?
Lock-in investments are instruments where the money invested cannot be withdrawn before the stipulated time under normal circumstances. In India, options like PPF, EPF, NPS, Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme, and tax-saving mutual funds fall into this category. These schemes aim to encourage long-term savings to create a secure fund for retirement or their children’s future. While their rules are strict during life, these strict rules also provide security in the long run.
What changes after an investor’s death?
After an investor’s death, the law clearly states that the funds belong to their nominee or legal heir. However, the withdrawal process isn’t automatically simplified. Each scheme has its own rules, which must be followed. Nomination plays a crucial role at this point. If the nominee is correctly registered in the account, the process becomes much simpler, and the family doesn’t have to run around unnecessarily.
How nomination simplify the process?
When a nominee is pre-determined for an investment, many complexities are automatically eliminated. In EPF, the funds are transferred directly to the nominee upon submission of the required forms and documents. In NPS, the entire amount can be withdrawn before retirement age. Even 15-year lock-in schemes like PPF can be closed after the account holder’s death, and the funds are transferred to the nominee. Sukanya Samriddhi Yojana and SCSS also have clear rules for death cases, providing relief to the family.
Where problems arise without a nomination?
If a nominee is not registered for an investment, problems arise. Banks or institutions cannot disburse funds directly to a single individual. In such cases, documents such as proof of legal heir, succession certificate, or probate of a will are required. Sometimes, heirs live in different cities or documents are incomplete, delaying the process for months. While having a will is helpful, it must include complete details of the investment, making it easier to process later.
Tax rules don’t completely disappear even after death.
People often assume that tax concerns are eliminated after death, but this is not true. Proceeds from schemes like PPF, EPF, and Sukanya Samriddhi are generally tax-free. Whereas, tax on NPS and mutual funds depends on how and when the money is withdrawn. If the amount is large, it’s better to seek expert advice rather than redeeming everything without thinking.
Small preparations today, big relief tomorrow
If you specify the correct nominee for every investment today, create a simple list of your investments, and share this information with a trusted member, you can save your family from major trouble in the future. Lock-in investments are meant to protect your hard-earned money, but without proper preparation, this protection can become a burden on your family. A little common sense can ensure that your money reaches the right people at the right time.
Frequently Asked Questions (FAQs)
Question: Does lock-in terminate immediately upon the investor’s death?
Answer: Lock-in terms generally apply, but most plans have provisions for closing the account or withdrawing funds after death.
Question: Is having a will enough?
Answer: A will helps, but if there is no nominee, additional legal documents may still be required.
Question: Are all locked-in investments tax-free?
Answer: No, some schemes are tax-free, while tax rules apply to NPS and mutual funds.
Question: How important is it to change the nominee?
Answer: It’s very important to update the nominee with any life changes to avoid future disputes.
Disclaimer: This article is for general information purposes only. Investment and tax rules may change from time to time. Please consult a qualified financial advisor or legal expert before making any financial or legal decisions.
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