I have created a custom field Assigned To which is user picker type of field. This field will display all the users whom issue reporter can assign issues. I am not sure how do I initiate email when a jira issue is assigned to a user through a custom field.
I went to Notification schema and Added notification for Issue Assigned event User Custom Field Value (Assigned To). Yet when I assigne a issue to Assigned To, he does not seem to recieve email.
Where I am going wrong.
I think you might be making incorrect assumptions.
Jira only considers an issue assigned to the person in the system field "Assignee". Your custom field ("Assigned to") is utterly irrelevant to who the assignee is, unless you start messing with code.
If you are only changing the value of the field "assigned to", then that is an "issue updated" event, not an "issue assigned". You should be able to test that by adding the field to the "issue updated" event (via User Custom Field Value - you were spot on with what you were doing there!)
To expand on my "messing with code" comment - you have two options, sort of.
1. Hack the core of Jira so it uses your field instead of assignee
2. Write or find a listener that will update the assignee automatically from your field.
In both cases though, you're using "OnDemand", so I don't think you'll be able to install anything that would do it.
I think you need to revist permissions and how you're using the "can be assigned an issue" permission
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