FIFO Taxation for Shares and ETFs: Rules and Tax Impact

Introduction

Have you ever bought the same share or ETF at different prices and later sold only a part of your holding? The main tax question in such cases is which units should be treated as sold first and which purchase price should be used for capital gains calculation. This is where FIFO taxation for shares and ETFs becomes important.

Under the FIFO method, the earliest purchased shares or ETF units are considered sold first, which affects the cost of acquisition, holding period, short-term capital gains, long-term capital gains and final tax liability.

In this blog, we will understand the meaning of FIFO taxation for shares and ETFs, how it works for demat holdings, its tax impact and its treatment under the Indian income-tax framework, including the Income-tax Act, 2025.

Applicability of Income-tax Act, 2025

The Income-tax Act, 2025 applies to Tax Year 2026-27 onwards. The Income Tax Department explains that the concept of “Tax Year” applies from 1 April 2026, for income earned during FY 2026-27 onwards. Applications or matters relating to a tax year starting before 1 April 2026 continue under the Income-tax Act, 1961.

For taxpayers who want a separate overview of new capital gains provisions, Ebizfiling has also explained Sections 196 and 198 of the Income Tax Act, 2025 in detail.

The main references are mapped as follows:

What is FIFO Taxation for Shares and ETFs?

FIFO taxation for shares and ETFs is the method used to identify which shares or ETF units are sold when the same security has been purchased in different lots. Under FIFO, the units bought first are treated as sold first.

Under Section 67(7)(c) of the Income-tax Act, 2025, where a person has beneficial interest in securities and gains arise from transfer made by the depository or participant, the cost of acquisition and period of holding of such securities are determined using the first-in-first-out method. This corresponds to Section 45(2A) of the earlier Income-tax Act, 1961.

This makes FIFO taxation for shares and ETFs important because an investor cannot simply choose a later purchase lot to reduce tax. The FIFO method for shares taxation is especially relevant where the same share or ETF has been purchased on different dates and at different prices.

Why is FIFO Used for Shares and ETFs?

FIFO taxation for shares and ETFs is used to create a clear link between purchase lots and sold units. Without FIFO, investors may use different assumptions for the same holding, which can lead to incorrect capital gains reporting.

The FIFO method helps determine:

• Which purchase lot is matched with the sale
• Cost of acquisition of the sold units
• Period of holding of the sold units
• Whether the gain is short-term or long-term
• Whether Section 196, Section 198 or Section 76 of the Income-tax Act, 2025 applies

For demat holdings, FIFO taxation for shares and ETFs is not only an accounting method. It directly affects tax computation because the law recognises FIFO for securities held through the depository system.

How FIFO Taxation for Shares and ETFs Works?

FIFO taxation for shares and ETFs works in this order:

• List all purchases of the same share or ETF by date.
• Start with the oldest available purchase lot.
• Match the sale quantity against the oldest lot first.
• Move to the next lot only after the earlier lot is fully used.
• Calculate capital gain using the matched purchase cost and holding period.

The FIFO method for shares taxation should be applied security-wise. For example, FIFO for shares of one company should not be mixed with shares of another company. Similarly, units of one ETF scheme should not be mixed with another ETF scheme.

Example of FIFO Taxation for Shares and ETFs

Suppose an investor bought units of the same listed ETF as follows:

Under FIFO taxation for shares and ETFs, the 150 units sold on 20 August 2026 will be matched as follows:

Capital gain calculation:

This example shows why FIFO taxation for shares and ETFs affects both the gain amount and the holding period. If one lot qualifies as long-term and another lot remains short-term, the same sale can have both LTCG and STCG components.

FIFO Capital Gains Calculator for Shares and ETFs

The above example shows how FIFO taxation for shares and ETFs works when shares or ETF units are bought in multiple lots and sold partly. To make the calculation easier, you can use the FIFO Capital Gains Calculator below. It helps estimate which purchase lots are treated as sold first, total cost of acquisition, sale value and capital gain or loss.

Note: This calculator gives an indicative FIFO-based estimate only. Final tax treatment may depend on STT, ETF type, corporate actions, Section 76 applicability, brokerage, transaction charges and applicable income-tax rules. For accurate ITR reporting, taxpayers should verify the calculation with broker statements, demat records and applicable tax provisions.

Tax Impact of FIFO Taxation for Shares and ETFs

1. Impact on Cost of Acquisition

FIFO taxation for shares and ETFs decides which purchase cost will be used first. If older units were purchased at a lower price, the taxable gain may be higher. If older units were purchased at a higher price, the gain may be lower or there may be a capital loss.

The cost of acquisition is important because capital gain is generally calculated by reducing eligible cost and transfer-related expenses from the sale consideration.

2. Impact on Holding Period

The holding period is calculated from the date of purchase of the units treated as sold under FIFO. For listed equity shares and equity-oriented fund units, the holding period threshold is generally 12 months for long-term classification.

Therefore, FIFO taxation for shares and ETFs can affect whether the gain is treated as STCG or LTCG.

3. Impact on STCG Tax

Under Section 196 of the Income-tax Act, 2025, short-term capital gains from transfer of equity shares, units of equity-oriented funds or units of business trusts are taxable at 20% where the sale transaction is chargeable to Securities Transaction Tax. This corresponds to the earlier Section 111A framework.

This means FIFO taxation for shares and ETFs can decide whether the gain falls into the short-term bucket and becomes taxable at the special STCG rate.

4. Impact on LTCG Tax

Under Section 198 of the Income-tax Act, 2025, long-term capital gains from transfer of equity shares, units of equity-oriented funds or units of business trusts are taxable at 12.5% on gains exceeding ₹1,25,000 where the prescribed conditions are satisfied. This corresponds to the earlier Section 112A framework.

For readers comparing old and new provisions, Ebizfiling’s guide on Section 111A and Section 112A capital gains rules can be useful.

Therefore, FIFO taxation for shares and ETFs may decide whether the investor can use the LTCG threshold for qualifying equity shares or equity-oriented ETF units.

ETF Taxation and FIFO Rules

FIFO taxation for shares and ETFs applies to ETF units held in demat form because ETF units are securities held through the depository system. However, the tax result depends on the nature of the ETF.

Equity ETFs

An equity ETF may qualify for the special equity capital gains regime if it satisfies the conditions for an equity-oriented fund and the required STT conditions are met. In such cases:

The FIFO method for shares taxation should be applied first to identify the purchase lot and holding period. After that, the correct tax provision should be applied.

Debt and Specified Mutual Fund ETFs

Not every ETF receives equity ETF tax treatment. Debt-oriented ETFs or certain ETF structures may fall under the specified mutual fund rules, depending on their underlying investment composition.

Under Section 76 of the Income-tax Act, 2025, gains from units of a Specified Mutual Fund acquired on or after 1 April 2023, market-linked debentures, and certain unlisted bonds or debentures are treated as short-term capital gains and computed under the special formula provided in that section.

For this purpose, a Specified Mutual Fund includes a mutual fund which invests more than 65% of its total proceeds in debt and money market instruments, or a fund which invests 65% or more of its total proceeds in units of such mutual fund. The percentage is computed with reference to the annual average of daily closing figures.

Investors dealing with commodity-linked ETF investments may also find Ebizfiling’s guide on Gold tax planning useful for related tax considerations.

Therefore, FIFO taxation for shares and ETFs identifies which ETF units are sold, but the final tax result depends on whether the ETF is equity-oriented or falls under specified mutual fund rules.

Difference Between FIFO Method and Average Cost Method

The FIFO method for shares taxation is safer for income-tax reporting because it follows the statutory identification method for demat securities.

Documents Needed for FIFO Tax Calculation

Investors should maintain proper records because FIFO taxation for shares and ETFs depends on exact purchase and sale details. Useful documents include:

• Demat account statement
• Broker contract notes
• Broker capital gains statement
• Purchase and sale dates
• ISIN and name of security
• Quantity bought and sold
• Brokerage and eligible transfer-related expenses
• Corporate action records, such as bonus, split, merger or demerger

The FIFO method for shares taxation should also be reconciled with AIS, Form 26AS, broker reports and the capital gains schedule in the income tax return.

Taxpayers with capital gains from shares, ETFs or mutual funds may also refer to Ebizfiling’s guide on ITR-2 form filing.

Mistakes made in FIFO Tax Calculation

Investors should avoid these common errors while applying FIFO taxation for shares and ETFs:

• Using average cost instead of FIFO for demat securities
• Matching sale with the most recent purchase lot
• Ignoring multiple purchases on different dates
• Mixing different securities or different ETF schemes
• Ignoring corporate actions such as bonus or stock split
• Treating every ETF as an equity ETF without checking its composition
• Not separating STCG and LTCG in the same sale
• Reporting broker summary without checking FIFO details

The FIFO method for shares taxation should be reviewed carefully before filing the ITR, especially where there are frequent trades.

Practical Points for Investors in FIFO taxation for shares and ETFs

FIFO taxation for shares and ETFs should be checked before filing the income tax return. Investors should review whether the broker’s capital gains report has applied FIFO correctly and whether the ETF category has been classified properly.

Key points to check:

• Whether the security is an equity share, equity ETF, debt ETF or other ETF
• Whether STT conditions are satisfied
• Whether the holding period is short-term or long-term
• Whether Section 196, Section 198 or Section 76 applies
• Whether corporate actions changed the cost or quantity
• Whether the same security appears across multiple broker accounts or demat accounts

Need Help Reporting Share and ETF Capital Gains Correctly?

FIFO-based capital gains calculation can become confusing when there are multiple buy orders, partial sales, bonus shares, stock splits, multiple demat accounts or different types of ETFs. A small error in matching purchase lots or classifying gains as STCG or LTCG can affect the final tax amount reported in the ITR.

Ebizfiling can assist investors and taxpayers with reviewing broker capital gains statements, applying FIFO taxation for shares and ETFs correctly, identifying the correct holding period and checking whether Section 196, Section 198 or Section 76 of the Income-tax Act, 2025 applies. Its Income Tax Return Filing service can help taxpayers report capital gains from shares, ETFs and mutual funds in the applicable ITR form.

For taxpayers with frequent trades, ETF investments, bonus shares, stock splits or complex capital gains reporting, Ebizfiling also provides professional review through its tax consultancy services.

Conclusion

FIFO taxation for shares and ETFs is important because it decides which purchase lot is treated as sold first. It affects cost of acquisition, holding period, STCG, LTCG and the applicable tax rate. Under the Income-tax Act, 2025, investors should apply FIFO correctly and also check whether the ETF is equity-oriented or covered by specified mutual fund rules. Proper records and careful reconciliation can help avoid errors in capital gains reporting.

Frequently Asked Questions