FIFO method

Shares in a demat account are fungible — one share of a company is indistinguishable from another. So when an investor who bought the same share at different dates and prices sells part of the holding, tax law needs a rule for which shares were sold.

Under Section 45(2A), for securities held in demat form, that rule is First-In-First-Out (FIFO): the securities that first entered the demat account are deemed to be the first sold. Equivalently, the securities acquired last are taken to be the ones still held.

FIFO decides two things at once: the period of holding (short-term or long-term) and the cost of acquisition. The investor does not get to pick.

Account-wise, not investor-wise. An investor may hold several demat accounts. FIFO is applied account by account: when one account is debited for a sale, securities lying in another account cannot be treated as sold, because they remain there.

Date of entry, not date of purchase. If old physical shares are dematerialised and credited later into an existing account, FIFO looks at the date of entry into the account.

Period of holding is otherwise determined from the contract note or broker's note, provided the transaction is followed by delivery and transfer deeds.

The workbook's Example 1:

If 2,500 shares are sold, the first 2,000 take their cost from 25-5-2020, and the other 500 are treated as acquired on 1-11-2005, at the relevant cost. The 3,000 shares bought in 2001 are last in the queue — despite being the oldest purchase — because they were credited last.

Illustrative figures.

Rahul has two demat accounts holding shares of the same listed company.

In September 2025 he sells 1,200 shares from account A at Rs 700, through the exchange with STT paid. He would like to say he sold the newer, costlier shares. FIFO says otherwise:

The 500 shares in account B are untouched — FIFO does not reach across accounts.

Tax, assuming no other equity gains in the year:

LTCG u/s 112A: (3,00,000 − 1,25,000) × 12.5% = Rs 21,875
STCG u/s 111A:  20,000 × 20%                 = Rs  4,000

The workbook's Chapter 13 caselet adds a twist. Where inherited shares are credited first and bonus shares later, FIFO sends the inherited shares out first — with their grandfathered cost — and the nil-cost bonus shares last, so the large taxable gain arrives in a later year.

Chapter 8 (Capital Gains), Table 8.2 on the period of holding for securities in demat form and Table 8.4 on cost of acquisition; Chapter 11 (Taxation of Equity Products), section on securities held in demat form, with Example 1; Chapter 13 Caselet 2 on inherited and bonus shares. Expect a table of credits and a sale quantity, and a question on the resulting holding period or cost.

• FIFO is compulsory for demat holdings. The investor cannot choose which lot was sold.
• Account-wise. A sale from one demat account never draws on another account.
• Date of entry into the account governs, not the original purchase date — dematerialised old certificates join the queue on their credit date.
• FIFO sets both period of holding and cost of acquisition.
• Bonus shares credited later are sold later, and carry nil cost unless the Section 112A grandfathering conditions apply.