The hidden problem most investors miss
Many stock market investors unknowingly pay far more tax than they should simply because of how they manage their Demat accounts. The reason? Most people hold both their long-term investments and short-term trading positions in the same Demat account.
On the surface, this looks simple and convenient. But when it comes to taxation, it creates a trap that leads to higher taxable gains — and bigger tax bills.
How FIFO inflates your tax bill
India’s tax system follows FIFO – First In, First Out. This means when you sell shares, the system assumes you’re selling your oldest holdings first, even if your intention was to sell recent trades.
Here’s a simple example:
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You buy 100 shares at ₹100 each for long-term investment.
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Later, you buy 50 shares at ₹180 each for short-term trading.
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A few weeks later, you sell the 50 shares at ₹200 each.
What you think your profit is:
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Trading profit = ₹20 per share (₹200 – ₹180).
What the tax system says your profit is:
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Since FIFO applies, it counts the ₹100 long-term shares as sold first.
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Taxable profit = ₹100 per share (₹200 – ₹100).
So instead of being taxed on ₹1,000 profit (50 × ₹20), you’re taxed on ₹5,000 profit (50 × ₹100).
That’s a huge jump — and this happens only because everything is mixed in one account.
The fix: Separate your holdings
The solution is straightforward: keep your long-term and short-term investments in separate Demat accounts.
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One Demat account for long-term holdings.
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Another Demat account for short-term trades.
This way, you control which shares you’re selling, and the FIFO rule applies within each account separately. By simply separating accounts, you prevent long-term investments from being treated as short-term sales.
How Zerodha makes it easier
Recently, Zerodha introduced a Secondary Demat Account feature. This allows investors to create a second Demat account under the same login, making it far easier to separate long-term and short-term holdings.
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Zerodha users can activate this feature for better tax planning.
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Even non-Zerodha users can do this by opening Demat accounts with different brokers.
Either way, the principle is the same: segregation gives you tax control.
Why this matters
For small traders, this could mean saving thousands of rupees a year. For larger portfolios, it could mean lakhs in tax savings over time.
In stock market investing, we often focus on making the right trades. But managing tax efficiency is equally important. As the saying goes: It’s not just about what you earn, it’s also about what you keep.
Conclusion
By using separate Demat accounts — or Zerodha’s new Secondary Demat Account feature — you can legally and effectively reduce your tax burden. It’s a simple, practical tax hack that can save you big money in the long run.
If you invest in stocks, this one adjustment could mean the difference between paying heavy taxes and keeping more of your hard-earned profits.
Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Readers should consult a qualified professional before making any investment or tax-related decisions.
Details in this article have been referenced from a LinkedIn post by CA Nitesh Buddhadev.
