Quick Answer

FIFO, First In First Out, decides which units get sold first from your demat account or mutual fund folio during a partial redemption. Your oldest purchase always exits before newer ones. Since your holding period decides the tax rate, FIFO shapes whether a sale counts as short-term or long-term. It applies to equity funds, debt funds, and shares alike, and you cannot choose which lot to sell instead.

What Is FIFO in Demat?
How FIFO Works, Step by Step
Practical Example With Numbers
FIFO and Debt Fund Taxation
Key Features of FIFO in Demat
Advantages of FIFO
Risks and Limitations
Tips for Beginners
FIFO Impact: Equity Funds vs Debt Funds
Common Mistakes to Avoid
Who Should Care About FIFO?
Conclusion
Frequently Asked Questions

Say you have been running a monthly SIP in an equity fund for two years. One month you need cash and redeem 200 units. Which 200 units did you actually sell, this month’s purchase or the very first instalment you made two years ago? You did not pick. Your depository already decided it for you, using a rule called FIFO.

FIFO stands for First In, First Out. It is the method NSDL and CDSL use to identify which of your holdings leave your demat account or mutual fund folio first whenever you sell only part of what you own. Since your tax bill depends on how long you held those specific units, FIFO has a direct say in whether you pay 20 percent short-term tax or the lower long-term rate. This article explains exactly how that works, with real numbers, so a partial redemption does not surprise you at tax time.

What Is FIFO in Demat?

FIFO means the units you bought earliest are treated as the units you sell first. It is a fixed sequence, not something you choose at the moment of selling.

Picture a queue outside a ration shop. Whoever joined first gets served first, no matter who is in a hurry. Your oldest mutual fund units or shares work the same way. They are first in line to leave, even if you have bought the same fund five or six times over the years at different prices.

This rule exists because most investors do not buy a fund just once. SIPs, top-ups, and bonus share allotments all create separate purchase batches with different dates and prices. NSDL and CDSL apply FIFO the same way everywhere in India, so your capital gains come out the same whether you invest through Alice Blue, a mutual fund house directly, or any other broker or trading platform.

FIFO covers both listed shares held in a demat account and mutual fund units, whether they are held in demat form or through a folio linked to your PAN.

How FIFO Works, Step by Step

Every purchase is logged as its own batch. A lump sum buy, an SIP instalment, or a dividend reinvestment each gets its own purchase date and cost recorded separately.
Batches are stacked oldest to newest by purchase date.
A sale is matched against the oldest batch first. When you redeem or sell, the system pulls from your earliest purchase before touching anything newer.
Holding period comes from that batch’s date. If the oldest batch was bought over 12 months ago, that portion of the sale is long-term. If it is 12 months or less, it is short term.
If one sale spans more than one batch, FIFO moves to the next batch after the first is used up. A single redemption can pull from two, three, or more batches at once.
Gain or loss is worked out batch by batch. It is sale price minus that batch’s actual cost, not an average of everything you have paid for the fund.
Tax follows from there. For equity shares and equity mutual funds, short-term gains are taxed at 20 percent under Section 111A, and long-term gains are taxed at 12.5 percent under Section 112A above ₹1.25 lakh a year. Debt funds follow a different rule, covered below.

Practical Example With Numbers

Priya runs an SIP in an equity fund and adds a lump sum later. Here is her purchase history.

Purchase Date	Units Bought	NAV (₹)	Amount (₹)
15 Jan 2025	100	50	5,000
15 Apr 2025	100	55	5,500
15 Jul 2025	100	60	6,000

On 20 Sep 2026, she redeems 150 units at an NAV of ₹70.

FIFO pulls first from the 15 Jan 2025 batch, held for about 20 months, and then from the 15 Apr 2025 batch, held for about 17 months, to make up the remaining 50 units.

Batch 1: 100 units × (₹70 minus ₹50) = ₹2,000 gain
Batch 2: 50 units × (₹70 minus ₹55) = ₹750 gain
Total gain = ₹2,750

Both batches crossed the 12-month mark, so the full ₹2,750 counts as long-term. If Priya’s total equity LTCG for the year stays under ₹1.25 lakh, this gain is tax-free. If it crosses that limit, only the amount above it gets taxed at 12.5 percent.

Priya had no choice here. Even if she had wanted to sell her costliest, most recent lot to book a smaller gain, FIFO forced the sale through her cheapest, oldest units instead.

FIFO and Debt Fund Taxation

Debt funds follow FIFO for the same reason equity funds do. The oldest units still exit first during a partial redemption. Where debt funds differ is in what happens after that sequencing is settled.

For debt mutual funds purchased on or after 1 April 2023, there is no separate long-term rate and no indexation benefit anymore. Regardless of how long you have held the units, gains are added to your income and taxed at your regular income tax slab rate. FIFO still decides which batch of debt fund units gets matched to your sale, but the holding period no longer changes the tax rate the way it does for equity funds.

Suppose Priya also holds a debt fund bought in three lots over 18 months and redeems part of it. FIFO picks her earliest batch first, exactly as with equity funds. Whatever gain comes out of that calculation gets added to her taxable income for the year, taxed at her slab rate, with no 12.5 percent rate or ₹1.25 lakh exemption to fall back on.

Key Features of FIFO in Demat

Automatic, not a choice. You cannot pick which batch of units or shares gets sold. The depository applies FIFO by default.
Covers direct shares and mutual funds alike, whether it is stock trades in your demat account or fund units in a folio.
Each SIP instalment is its own lot. A year of monthly SIPs means twelve separate purchase records, each with its own 12-month clock.
Decides the holding period, which decides the tax rate. For equity, that means the difference between 20 percent and 12.5 percent. For debt, it decides how the sale is reported even though the rate stays the same.
Standard across every Indian broker. The underlying calculation does not change based on which platform you use.

Advantages of FIFO

Removes guesswork from tax filing. Because the sale order is fixed, there is no dispute over which units were sold.
Often favours long-term treatment for consistent investors. Selling oldest first tends to push more of your gains into the long-term bucket, which for equity means the lower 12.5 percent rate and the ₹1.25 lakh exemption.
One method applies everywhere. Your gains calculation stays identical no matter which broker or registrar generated your statement.

Risks and Limitations

You lose control over which lot gets sold. If you wanted to sell a recent, costly lot to book a loss and offset gains elsewhere, FIFO will not let you choose it.
It can produce a bigger taxable gain than you expected, since your cheapest, oldest units usually go first.
SIP investors deal with several small lots at once. Years of monthly SIPs mean a single redemption might touch four or five batches, each with a different holding period.
Debt fund investors get no tax benefit from a longer holding period. Since indexation is gone for units bought after April 2023, holding a debt fund longer does not lower your tax rate the way it does for equity.
Unexpected tax bills catch beginners off guard when they redeem without checking which batch FIFO will pick.

Tips for Beginners

Pull your capital gains statement from your broker, CAMS, or KFintech before redeeming, instead of guessing your tax outcome from memory.
If you are planning a partial redemption, work out the expected gain using FIFO logic first.
Track SIP dates closely. Each instalment crosses the 12-month mark on a different day.
Use the ₹1.25 lakh LTCG exemption on purpose. If you are near the limit, consider spreading redemptions across two financial years.
Remember debt funds do not get a long-term tax discount anymore, so do not factor in indexation savings that no longer exist.
Keep your own record of purchase batches, date, units, and price, alongside your demat account statement.

FIFO Impact: Equity Funds vs Debt Funds

Parameter	Equity Mutual Funds	Debt Mutual Funds (bought after 1 April 2023)
FIFO applies to redemption order	Yes	Yes
Long-term holding period	Over 12 months	No separate long-term category
Short-term tax rate	20 percent, Section 111A	Taxed at income slab rate
Long-term tax rate	12.5 percent above ₹1.25 lakh a year, Section 112A	Same as slab rate, no separate LTCG rate
Indexation benefit	Not applicable to equity	Removed for units bought on or after 1 April 2023
Effect of longer holding	Lowers tax rate	No tax rate benefit, only affects which batch FIFO picks

Common Mistakes to Avoid

Assuming you can pick which units to sell. FIFO removes that choice entirely.
Treating a year of SIPs as one purchase. Each instalment has its own date and its own 12-month clock.
Skipping the capital gains statement before redeeming and relying on a rough average price instead.
Forgetting the ₹1.25 lakh exemption applies across all your equity holdings combined, not separately for each fund.
Assuming debt funds still get indexation. That benefit is gone for units bought after April 2023.
Not checking whether a mid-sale batch switch pushes part of the sale into short-term territory.

Who Should Care About FIFO?

SIP investors making partial withdrawals, since multiple lots mean FIFO’s sequencing directly shapes what they owe.
Long-term investors planning an exit, since knowing the oldest units go first helps estimate the tax outcome before placing the order.
Anyone holding both equity and debt funds, since the tax outcome differs sharply between the two even though FIFO governs both the same way.

It matters far less if you redeem an entire holding in one go, since there is no batch to sequence when nothing is left behind.

Conclusion

FIFO decides which of your mutual fund units or shares count as sold first whenever you redeem only part of your holding, and that sequencing directly decides your holding period and tax rate. For equity funds, it usually pushes gains toward the long-term, lower tax bucket. For debt funds, holding period no longer changes your tax rate at all after the 2023 indexation removal. You cannot choose which lot FIFO sells, but you can check your capital gains statement before redeeming and time your exits with the ₹1.25 lakh exemption in mind.