The Hidden Tax Trap That’s Killing Your Compounding Gains
Did you know a single rule in your Demat account could be quietly draining your portfolio’s power and costing you thousands in taxes? It’s called FIFO (First In, First Out), and it’s a rule that most retail investors overlook at their peril.
Here’s the trap: When you sell shares, the FIFO rule assumes you’re selling the oldest shares you own—no matter what your intention is.
Let’s look at a classic example from financial consultant Aman Kumar:
Suppose you bought 120 shares of a company in 2022 at ₹900 each and another 120 in 2025 at ₹1,500 each. Today, you decide to sell 120 shares at ₹1,700.
In a single Demat account, the FIFO rule kicks in. You’ve sold the 2022 shares.
- Gain: ₹800 per share × 120 shares = ₹96,000
- Tax: This is a long-term capital gain. At a 12.5% tax rate, you’ll pay ₹12,000.
The real cost, however, isn’t just the tax bill. Your most valuable, long-term compounding shares are now gone.
The Smart Way to Beat FIFO
The good news? There’s a simple, legal strategy to bypass this trap. The key is understanding that FIFO applies per account, not per PAN.
This is where a secondary Demat account becomes a game-changer. By separating your long-term holdings from your short-term trades, you regain control.
Let’s revisit our example with a second account:
You move your 2022 shares to a secondary Demat account. Now, your original account only holds the 2025 shares. When you sell 120 shares at ₹1,700, you simply sell them from this account.
- Gain: ₹200 per share × 120 shares = ₹24,000
- Tax: This is a short-term capital gain. At a 20% tax rate, you’ll pay just ₹4,800.
You pay less in taxes and, more importantly, your long-term wealth creators—the shares you bought at ₹900—remain untouched, continuing to compound for your future.
For serious investors, a second Demat account isn’t a loophole; it’s a structural strategy for smart wealth creation. Don’t let a hidden rule kill your compounding gains.