When iron nails are placed in copper sulphate solution, a displacement reaction takes place. In this reaction, iron (Fe) displaces copper (Cu) from its salt \((CuSO_4)\) because iron is more reactive than copper.
The reaction is:
\[
\text{Fe} (s) + \text{CuSO}_4 (aq) \rightarrow \text{FeSO}_4 (aq) + \text{Cu} (s)
\]
In this process, copper metal is displaced from the solution, and it starts appearing as reddish-brown solid at the bottom of the container, while iron ions enter the solution to form iron(II) sulphate. The colour change is a direct result of the copper metal (reddish-brown) formed in the solution.
Thus, the correct answer is (D) Reddish brown.