FIFO Tax Entice: Is It Actually a Massive Deal for Lengthy-Time period Buyers?

Introduction

I got here throughout an article in Enterprise In the present day (BT) in regards to the FIFO tax entice. It’s an excellent learn. It explains how the First In, First Out (FIFO) rule in Demat accounts can have an effect on your taxes.

But it surely obtained me considering. As somebody who’s been investing in shares for years, I see this in another way.

The BT’s article focuses on taxes and shedding long-term shares. I feel it’s making a good level.

However is it actually a game-changer for long-term traders? I don’t suppose so.

Let me share my perspective. It’s not about presenting a counter to what BT is making an attempt to say. What’s that article is saying if an necessary realization for all inventory traders.

However I would like you to see the FIFO by a long run investor’s lens, not solely from the tax lens.

What’s FIFO For Our Demat Accounts?

FIFO means First In, First Out.

If you promote shares out of your Demat account, it assumes you’re promoting the oldest ones first.

For instance:

• You purchase 100 shares in 2020 at Rs.500 every.
• Then, you purchase 100 extra in 2024 at Rs.1,200.
• Now, in 2025, you promote 100 shares in 2025 at Rs.1,500.
• As per FIFO rule, it is going to assume that you just offered the 2020 shares.

So what, how does it make the distinction?

• As per FIFO, your achieve is Rs.100,000 [=100 nos * (1,500 – 500)].
• That’s a long-term capital achieve (LTCG). Taxed at 12.5%.
• You pay Rs.12,500 in taxes (=12.5% * 100,000)

Had it been the opposite manner (you promoting the 2024 share:

• When no FIFO is utilized: Your achieve is Rs.30,000 [=100 nos * (1,500 – 1,200)].
• Let’s assume short-term capital achieve (STCG) is utilized at 30%.
• You pay Rs.9,000 (=30% * 30,000).

However right here’s the factor. In your thoughts, it mustn’t matter what your demat account assumes. How?

Even when the Demat assumes 2020 shares or 2024 shares, what left after the sale are 100 numbers shares.

What their worth? 100 x Rs.1,500 = Rs.1,50,000.

The value of your portfolio doesn’t change primarily based on which shares you “offered.” The tax calculation may differ. However your wealth stays the identical.

My Take – Deal with Wealth, Not Tax Methods

I can perceive. Saving taxes feels good. No person likes paying further.

However for long-term traders, is FIFO actually a entice?

I don’t suppose so.

For those who’re holding high quality shares for years collectively (say 10-15 years), your focus is on progress. Not on saving taxes on while you promote your shares.

Let’s take use our earlier instance once more:

• You may have 200 shares.
• 100 purchased in 2020 at Rs.500.
• One other 100 in 2024 at Rs.1,200.
• You promote 100 in 2025 at Rs.1,500. 

After the sale, you could have 100 shares left. Their worth is Rs.1,50,000. Whether or not FIFO picks the 2020 or 2024 shares, your portfolio’s price is unchanged.

The tax distinction? Positive, it exists. Let’s break it down.

Tax Calculation: FIFO vs. Non-FIFO (Lengthy-Time period Investor)

How should can be your Tax financial savings in case of non-FIFO rule? Rs.12,500 – Rs.9,000 = Rs.3,500. Not unhealthy.

However is it price opening a brand new Demat account? Or switching brokers? I don’t suppose so.

In case your portfolio is small, then Rs.6,500 issues. However when you’re managing say a Rs.1 crore portfolio, your focus must be on the massive image:

• Portfolio Measurement which is the same as variety of shares x present value.

That’s your wealth. Taxes are only a small half.

Lengthy-Time period Investing: Don’t Sweat the Small Stuff

First issues first, long-term traders not often promote.

I do know individuals who’ve held shares for nearly a decade. He’s somebody near me.

He purchased shares of a financial institution in 2005 at Rs.90 per share. In the present day, they’re price Rs.1,430 per share. I do know, he doesn’t promote usually. Perhaps as soon as each few years and that if there’s a drastic change within the firm’s thesis.

For him, FIFO is a minor annoyance.

His objective is greater? Purchase high quality shares. At good costs. Maintain endlessly.

What about taxes? He want to put it aside, foe positive, but when not he is not going to break his sweat over it. In his thoughts, tax loss is a small blip.

For those who’re a long-term investor, observe your buys and sells. That is what I counsel for my readers:

• Use a easy Excel sheet.
• Word what you obtain, when, and at what value.
• If you promote, file which lot you have offered.

Let your Demat deal with the tax math the best way it needs. Why?

As a result of your portfolio’s worth doesn’t care about FIFO. It cares about high quality of inventory purchased, value at which it’s purchased and the holding time.

For Brief-Time period Merchants, It’s A Totally different Story

Now for short-term merchants, the tax loss is usually a large factor.

For those who’re flipping a number of shares inside a yr, FIFO can sting. If you’re promoting usually, taxe legal responsibility will add up quick.

Right here, non-FIFO sort management which let’s you say which lot of shares you might be promoting can prevent cash.

Let’s take the assistance of numbers to know this level.

Tax Calculation: FIFO vs. Non-FIFO (Brief-Time period Dealer)

Take into account this situation: You purchase 100 shares in Jan 2025 at Rs.1,000. One other 100 in June 2025 at Rs.1,100. You promote 100 in Dec 2025 at Rs.1,300. All short-term (lower than a yr).

I would like you to notice the turnover within the above commerce (Rs.10.2 Lakhs):

Tunover = 300 x (1000+1100+1300) = Rs.10,20,000

What can be your tax financial savings between FIFO and Non-FIFO?

Rs.2,000 = Rs.6,000 – Rs.4,000

What was the amount you could have traded? Rs.10,20,000. What sort of tax saving we’re speaking about? It’s about 0.4% of your buying and selling quantity.

However if you’re common dealer who commerce with such volumes say 10 instances a yr, that about Rs.20,000 saved.

For merchants, this small-small value matter extra. Therefore, as recommended within the BT article, a second Demat account is smart right here. This manner you possibly can management which lot to promote.

Ought to You Swap Brokers for This?

The Enterprise In the present day article hints at utilizing a second Demat account to bypass FIFO.

It’s a sound technique.

However, I feel, one mustn’t don’t rush to open new accounts only for tax financial savings.

There can be prices right here too. Account opening charges. Annual costs. Time spent managing a number of accounts.

For long-term traders, is ₹6,500 definitely worth the problem? In all probability not.

Your focus must be on selecting nice firms. Shopping for on the proper value. Holding for years. Taxes are secondary.

For merchants, although, it’s completely different. Frequent gross sales imply frequent taxes. Saving ₹2,000 per commerce issues. A second Demat account offers you management. I’ll say, it’s price exploring.

However even then, weigh the prices. Don’t swap brokers blindly.

Conclusion

Right here’s what I do.

Maintain a Google Sheet.

• Log each purchase: date, value, amount.
• Log each promote: which lot, why you offered.

This manner, precisely what’s in your portfolio. Your Demat handles the tax submitting. You focus in your technique.

It’s easy. It’s efficient.

No must overcomplicate issues with a number of accounts until you’re buying and selling closely.

I feel being conscious of the FIFO rule is an effective factor. However isn’t a entice for everybody.

For long-term traders, it’s a minor element. Your wealth comes from high quality shares and time. Not from tax financial savings. My estimate is that, in a time horizon of say 20 years, the penalty of tax saving on our complete wealth (attributable to FIFO) can be beneath 1%.

What do you have to deal with as an alternative? Observe your investments. Keep targeted.

For merchants, FIFO issues extra. A second Demat account may also help.

Don’t let tax financial savings distract you from the larger image. Investing is about constructing wealth. Not chasing small wins.

Have a contented investing.