I have bought and sold shares from multiple demat accounts. How do I calculate capital gains?

I have bought and sold shares from multiple demat accounts. How to calculate capital gain. Do I need to apply FIFO or calculate using individual accounts? 

Reply by Sujit Bangar, Founder Taxbuddy.com 

Investors often grapple with the complexities of calculating capital gains, especially when shares are bought and sold through multiple demat accounts. While brokers provide their own capital gain statements, it’s crucial to understand the correct method of calculation, particularly when filing Income Tax Returns (ITR). Here, we delve into the right way to calculate capital gains using the FIFO (First-In, First-Out) method and highlight common pitfalls to avoid.

Understanding the FIFO Method

The FIFO method, as the name suggests, means that the shares bought first are considered sold first. This method is prescribed by the Income Tax Department for calculating capital gains.

The Correct Way to Calculate Capital Gains

When calculating capital gains for shares held in multiple demat accounts, it’s important to consolidate the purchase and sale transactions from all accounts. Here’s a step-by-step guide:

• Consolidate Transactions: Gather all purchase and sale transactions from different demat accounts.
• Sort Chronologically: Arrange all transactions in chronological order of purchase and sale dates.
• Apply FIFO Method: Match the sales with the earliest purchases using the FIFO method.
• Calculate Capital Gain: For each matched pair of purchase and sale, calculate the capital gain by subtracting the purchase cost from the sale price.

For mutual fund investors, consolidating capital gains can be streamlined with the help of transfer agents like CAMS (Computer Age Management Services) and KFintech. Both CAMS and KFintech have introduced services that provide a consolidated mutual fund capital gain statement. This consolidated statement simplifies the process, enabling taxpayers to accurately report their capital gains for mutual funds.

This link will help you to do the same - https://www.camsonline.com/Investors/Statements/Consolidated-Account-Statement

A frequent mistake is relying solely on the capital gain statements provided by individual brokers, which may not account for transactions across different demat accounts.

Benefits of FIFO:

FIFO ensures a fair and consistent calculation of capital gains across multiple demat accounts.
It helps you potentially minimize your overall tax liability by offsetting gains with losses from other transactions.

Understanding Grandfathering

The concept of grandfathering is essential for calculating capital gains, particularly after the introduction of the Long Term Capital Gains (LTCG) tax on equities. Here’s how it works:

• Determine Fair Market Value (FMV): The FMV of the shares as of January 31, 2018, is taken into account.
• Calculate Capital Gain: For shares bought before January 31, 2018, and sold after this date, the cost of acquisition will be the higher of the actual purchase price or the FMV as of January 31, 2018.
• Apply FIFO Method: Use the FIFO method to match sales with purchases, considering the grandfathered FMV for shares bought before January 31, 2018.

For accurate capital gains calculation, it’s essential to consolidate transactions across all demat accounts and apply the FIFO method correctly. Relying solely on individual broker statements can result in discrepancies and potential issues with your ITR filings.

By following the steps outlined above and leveraging the consolidated capital gain statements provided by CAMS and KFintech for mutual funds, investors can ensure they report their capital gains accurately and comply with tax regulations. Additionally, understanding and applying the grandfathering provision can significantly impact the calculation of capital gains for shares bought before January 31, 2018.