When it comes to trading and investing, most traders focus on stock selection, timing, and returns. But what many overlook is tax efficiency. A simple mistake in how your trades are executed can cost you more in taxes than you expect. One such hidden trap lies in the FIFO rule (First-in First-out) for capital gains taxation.

Let’s break this down with a real-life scenario and see how using a second demat account can make a big difference.

The Taxation Trap: FIFO in Action

Under the FIFO rule, the shares you bought first are assumed to be sold first—even if that’s not your real intention.

Scenario 1: Single Demat Account

• 18 Aug 2024 – Buy 2,500 shares of XYZ  Ltd. @ ₹100 (long-term holding)
• 18 Aug 2025 – Buy another 2,500 shares of XYZ Ltd. @ ₹180 (short-term trade)
• 25 Aug 2025 – Sell 2,500 shares of XYZ Ltd. @ ₹200

At first glance, you expect:

  Profit = ₹20 per share = ₹50,000 (short-term trade)

But FIFO changes the story:

• The system assumes you sold the first lot bought at ₹100.
• Taxable profit = ₹100 per share = ₹2,50,000 (LTCG).

Tax Impact:

• LTCG tax @ 12.5% = ₹31,250 
• Instead of STCG tax @ 20% = ₹10,000

You end up paying over 3X more in tax just because of FIFO.

Fixing FIFO with Two Demat Accounts

The simple way to avoid this problem is by keeping your trades and investments separate through two demat accounts.

Scenario 2: Two Demat Accounts

• Demat A 
  • 18 Aug 2024 – Buy 2,500 shares @ ₹100 (long-term investment) 
• Demat B 
  • 18 Aug 2025 – Buy 2,500 shares @ ₹180 (short-term trade)
  • 25 Aug 2025 – Sell 2,500 shares @ ₹200
    

Now, because trades are happening in separate demat accounts, FIFO applies within each account individually.

So, the shares in Demat B (bought at ₹180) are considered sold.
Profit = ₹20 per share = ₹50,000 (STCG only).

Tax Impact:

• STCG tax @ 20% = ₹10,000
  
• No unnecessary LTCG triggered.
  

You just saved ₹21,250 in taxes!

Mixing trades and investments in one demat can trigger extra taxes. By using two demat accounts, you separate long-term holdings from short-term trades, keep taxes accurate, and save more. Smart traders don’t just earn profits—they optimize taxes too.