Tax Saving Tips: Why Having Only One Demat Account Can Make You Lose Profit From Your Equities

Most investors still run all long-term bets and quick trades through a single Demat account. It feels simple, but in reality, that “simplicity” quietly eats into their returns at tax time. A basic accounting rule - First In, First Out (FIFO), forces them to sell the oldest holdings first, even when that wasn’t the intention. And that mistake is expensive.

But here’s the catch, tax rules don’t see it that way. The Income Tax Department applies the FIFO method to every sale you make. That means whenever you sell shares, the system assumes you sold the oldest holdings first, regardless of your intention. This quirk sounds harmless until you realise it can push up your tax bill unnecessarily. Investors often discover this the hard way when their carefully built long-term holdings vanish on paper just because they sold a newer batch for a quick profit.

The Central Board of Direct Taxes has been clear since 2007. The official circular states: “In the depository system, the investor can open and hold multiple accounts. In such a case, where an investor has more than one security account, FIFO method will be applied accountwise. This is because in case where a particular account of an investor is debited for sale of securities, the securities lying in his other account cannot be construed to have been sold as they continue to remain in that account.”

That’s the technical validation. Separate accounts, separate FIFO.

What Is The Impact Of FIFO?

Think of it like mixing groceries. You bought rice two years ago at Rs 50/kg to stock up, then last week you bought a fresher batch at Rs 70/kg for everyday cooking. When you open the bag, the system insists you’ve used up the old stock first, even if you were actually scooping from the new one. The result? The accounting books don’t reflect how you really used the items. In the case of stocks, the mismatch between “what you meant to sell” and “what FIFO assumes you sold” creates a tax headache.

This is where the role of multiple Demat accounts becomes crucial. By separating long-term investments from short-term trades, you essentially draw a line between two different baskets. The law allows it, clear as day, in a 2007 Central Board of Direct Taxes (CBDT) circular, which says FIFO is applied account-wise. One account’s holdings don’t get mixed with another. This one small structural change can mean the difference between paying tax on a modest gain or being forced to cough up on inflated profits.

Tax Expert Nitesh Buddhadev and Founder of Nimit Consultancy puts it plainly on why a single demat account can cost you more.

Most people throw everything into one bucket. Long-term investments, short-term trades all sits together. That’s where things go wrong.

Buddhadev points out the trap:

“And that’s where a key tax-saving opportunity is lost.”

Take a simple example.

Take entry in 100 shares at Rs 100 for long-term.

Later, buy another 50 shares of the same company at Rs 180, just for trading.

A few weeks later, take exit in those 50 equities at Rs 200.

From a logical perspective, there should be a profit of Rs 20 per share. That’s what a trader would think. But the tax system disagrees. FIFO rules say the first lot (the Rs 100 shares) got sold. Suddenly, the tax department calculates Rs 100 profit per share. The difference is brutal.

As Buddhadev explains:

“Why? Because taxes follow FIFO First In, First Out. The system assumes you sold your Rs 100 shares first. Result? Higher taxable gains and more tax to pay.”

The fix is not complicated.

“The fix: Keep your long-term and short-term holdings in separate Demat accounts. That way, you decide which lot to sell, giving you better control over tax,” he says.

Buddhadev explained that users can do this by opening two separate Demat accounts with different brokers.

Case 1: Without a secondary account with an illustrative example

Buy 100 shares of ABC at Rs 100 in January 2024.

In June, buy 100 more at Rs 150 for short-term trading.

In July, sell 100 shares at Rs 180.

FIFO forces you to sell the January batch (Rs 100 shares).

Profit = Rs 80 per share - Rs 8,000 total.

That profit is short-term capital gains. Your long-term lot is gone.

Case 2: When trading using a secondary account (illustrative example)

Move the holding of January (Rs 100 lot) to the secondary demat account.

Keep the June batch in the primary account.

Sell in July, FIFO applies only within the primary.

You sell the June lot (Rs 150 shares).

Profit = Rs 30 per share - Rs 3,000 total.

Your long-term investment remains untouched.