Introduction
I came across an article in Business Today (BT) about the FIFO tax trap. It’s a good read. It explains how the First In, First Out (FIFO) rule in Demat accounts can affect your taxes.
But it got me thinking. As someone who’s been investing in stocks for years, I see this differently.
The BT’s article focuses on taxes and losing long-term shares. I think it’s making a fair point.
But is it really a game-changer for long-term investors? I don’t think so.
Let me share my perspective. It’s not about presenting a counter to what BT is trying to say. What’s that article is saying if an important realization for all stock investors.
But I want you to see the FIFO through a long term investor’s lens, not only from the tax lens.
What’s FIFO For Our Demat Accounts?
FIFO means First In, First Out.
When you sell shares from your Demat account, it assumes you’re selling the oldest ones first.
For example:
- You buy 100 shares in 2020 at Rs.500 each.
- Then, you buy 100 more in 2024 at Rs.1,200.
- Now, in 2025, you sell 100 shares in 2025 at Rs.1,500.
- As per FIFO rule, it will assume that you sold the 2020 shares.
So what, how does it make the difference?
- As per FIFO, your gain is Rs.100,000 [=100 nos * (1,500 – 500)].
- That’s a long-term capital gain (LTCG). Taxed at 12.5%.
- You pay Rs.12,500 in taxes (=12.5% * 100,000)
Had it been the other way (you selling the 2024 share:
- When no FIFO is applied: Your gain is Rs.30,000 [=100 nos * (1,500 – 1,200)].
- Let’s assume short-term capital gain (STCG) is applied at 30%.
- You pay Rs.9,000 (=30% * 30,000).
But here’s the thing. In your mind, it should not matter what your demat account assumes. How?
Even if the Demat assumes 2020 shares or 2024 shares, what left after the sale are 100 numbers shares.
What their value? 100 x Rs.1,500 = Rs.1,50,000.
| SL | Description | FIFO Rule | No-FIFO Rule |
| 1 | Shares Held (Before Sale) | 200 Nos | 200 Nos |
| 2 | Shares Sold | 100 Nos (of 2020) | 100 Nos (of 2024) |
| 3 | Shares Held (After Sale) | 100 Nos | 100 Nos |
| 4 | Current Share Price | Rs.1,500 / share | Rs.1,500 / share |
| 5 | Value of Investment | Rs.1,50,000 | Rs.1,50,000 |
| 7 | Tax Liability | 12,500 (=12.5% x 100,000) | Rs.9,000 (=30% x 30,000) |
The worth of your portfolio doesn’t change based on which shares you “sold.” The tax calculation might differ. But your wealth remains the same.
My Take – Focus on Wealth, Not Tax Tricks
I can understand. Saving taxes feels good. Nobody likes paying extra.
But for long-term investors, is FIFO really a trap?
I don’t think so.
If you’re holding quality stocks for years together (say 10-15 years), your focus is on growth. Not on saving taxes on when you sell your stocks.
Let’s take use our earlier example again:
- You have 200 shares.
- 100 bought in 2020 at Rs.500.
- Another 100 in 2024 at Rs.1,200.
- You sell 100 in 2025 at Rs.1,500.
After the sale, you have 100 shares left. Their value is Rs.1,50,000. Whether FIFO picks the 2020 or 2024 shares, your portfolio’s worth is unchanged.
The tax difference? Sure, it exists. Let’s break it down.
Tax Calculation: FIFO vs. Non-FIFO (Long-Term Investor)
| SL | Description | FIFO Rule | Non-FIFO Rule | Remarks |
| 1 | Shares Sold | 100 Nos | 100 Nos | – |
| 2 | Sell Price | Rs.1500 / Share | Rs.1500 / Share | – |
| 3 | Buy Price | Rs.500 / Share | Rs.1,200 / Share | – |
| 4 | Capital Gain | Rs.100,000 (100 * (1500 – 500)) | Rs.30,000 (100 * (1500 – 1200)) | – |
| 5 | Holding Time | > 1 Year | < 1 Year | – |
| 6 | Applicable Tax Rate | 12.5% (LTCG) | Tax Slab (STCG), say 30% | – |
| 7 | Tax Liability | 12,500 (=12.5% x 100,000) | Rs.9,000 (=30% x 30,000) | Rs.9,000 Even after 30% Tax rate vs 12.5% |
How must will be your Tax savings in case of non-FIFO rule? Rs.12,500 – Rs.9,000 = Rs.3,500. Not bad.
But is it worth opening a new Demat account? Or switching brokers? I don’t think so.
If your portfolio is small, then Rs.6,500 matters. But if you’re managing say a Rs.1 crore portfolio, your focus should be on the big picture:
- Portfolio Size which is equal to number of shares x current price.
That’s your wealth. Taxes are just a small part.
Long-Term Investing: Don’t Sweat the Small Stuff
First things first, long-term investors rarely sell.
I know people who’ve held stocks for almost a decade. He is someone close to me.
He bought shares of a bank in 2005 at Rs.90 per share. Today, they’re worth Rs.1,430 per share. I know, he doesn’t sell often. Maybe once every few years and that if there is a drastic change in the company’s thesis.
For him, FIFO is a minor annoyance.
His goal is bigger? Buy quality stocks. At good prices. Hold forever.
What about taxes? He would like to save it, foe sure, but if not he will not break his sweat over it. In his mind, tax loss is a small blip.
If you’re a long-term investor, track your buys and sells. This is what I suggest for my readers:
- Use a simple Excel sheet.
- Note what you bought, when, and at what price.
- When you sell, record which lot you have sold.
Let your Demat handle the tax math the way it wants. Why?
Because your portfolio’s value doesn’t care about FIFO. It cares about quality of stock bought, price at which it’s bought and the holding time.
For Short-Term Traders, It’s A Different Story
Now for short-term traders, the tax loss can be a big thing.
If you’re flipping multiple stocks within a year, FIFO can sting. When you’re selling often, taxe liability will add up fast.
Here, non-FIFO type control which let’s you say which lot of shares you are selling can save you money.
Let’s take the help of numbers to understand this point.
Tax Calculation: FIFO vs. Non-FIFO (Short-Term Trader)
Consider this scenario: You buy 100 shares in Jan 2025 at Rs.1,000. Another 100 in June 2025 at Rs.1,100. You sell 100 in Dec 2025 at Rs.1,300. All short-term (less than a year).
| SL | Description | FIFO Rule | Non-FIFO Rule |
| 1 | Shares Bought (Jan 2025), Price | 100 Nos, Rs.1,000 each | 100 Nos, Rs.1,000 each |
| 2 | Shares Bought (June 2025), Price | 100 Nos, Rs.1,100 each | 100 Nos, Rs.1,100 each |
| 5 | Shares Sold (Dec 2025), Price | 100 Nos, Rs.1,300 each | 100 Nos, Rs.1,300 each |
| 6 | Gain (STCG) | Rs.30,00 [=100 * (1300-1000)] | Rs.20,00 [=100 * (1300-1100)] |
| 7 | Tax Liability @20% | Rs.6,000 (=20% * 30,000) | Rs.4,000 (=20% * 20,000) |
I want you to note the turnover in the above trade (Rs.10.2 Lakhs):
Tunover = 300 x (1000+1100+1300) = Rs.10,20,000
What will be your tax savings between FIFO and Non-FIFO?
Rs.2,000 = Rs.6,000 – Rs.4,000
What was the volume you have traded? Rs.10,20,000. What kind of tax saving we are talking about? It is about 0.4% of your trading volume.
But if you are regular trader who trade with such volumes say 10 times a year, that about Rs.20,000 saved.
For traders, this small-small cost matter more. Hence, as suggested in the BT article, a second Demat account makes sense here. This way you can control which lot to sell.
Should You Switch Brokers for This?
The Business Today article hints at using a second Demat account to bypass FIFO.
It’s a valid strategy.
But, I think, one should not don’t rush to open new accounts just for tax savings.
There will be costs here too. Account opening fees. Annual charges. Time spent managing multiple accounts.
For long-term investors, is ₹6,500 worth the hassle? Probably not.
Your focus should be on picking great companies. Buying at the right price. Holding for years. Taxes are secondary.
For traders, though, it’s different. Frequent sales mean frequent taxes. Saving ₹2,000 per trade matters. A second Demat account gives you control. I’ll say, it’s worth exploring.
But even then, weigh the costs. Don’t switch brokers blindly.
Conclusion
Here’s what I do.
Keep a Google Sheet.
- Log every buy: date, price, quantity.
- Log every sell: which lot, why you sold.
This way, you know exactly what’s in your portfolio. Your Demat handles the tax filing. You focus on your strategy.
It’s simple. It’s effective.
No need to overcomplicate things with multiple accounts unless you’re trading heavily.
I think being aware of the FIFO rule is a good thing. But isn’t a trap for everyone.
For long-term investors, it’s a minor detail. Your wealth comes from quality stocks and time. Not from tax savings. My estimate is that, in a time horizon of say 20 years, the penalty of tax saving on our total wealth (due to FIFO) will be below 1%.
What should you focus on instead? Track your investments. Stay focused.
For traders, FIFO matters more. A second Demat account can help.
Don’t let tax savings distract you from the bigger picture. Investing is about building wealth. Not chasing small wins.
Have a happy investing.
