Let us understand this issue of FIFO with a live example of an investor Janak who bought shares on different dates and then sold a chunk in one go. Let us see how practically the FIFO method is used to calculate the capital gains.

Assume that, Janak holds 2000 shares of Tata Steel as on 20th Aug 2018 purchased as under:

400 shares of Tata Steel bought at Rs.700 on 01st Jan 2017

300 shares of Tata Steel bought at Rs.650 on 05th June 2017

1000 shares of Tata Steel bought at Rs.550 on 02nd Feb 2018

300 shares of Tata Steel bought at Rs.510 on 05th May 2018

If he sells all his 1500 shares of Tata Steel at Rs.722 on 20th Aug, how will his capital gains be calculated?

Janak’s calculation of capital gains will be done as per the FIFO method and the calculation will be done as under:

Particulars

Shares and price

Explanation

Shares sold

1500 shares sold at Rs.722

FIFO Calculation 1

400 shares bought at Rs.700

Will be treated as LTCG

FIFO Calculation 2

300 shares bought at Rs.540

Will be treated as LTCG

FIFO Calculation 3

800 shares bought at Rs.550

Will be treated as STCG

The calculation of the capital gains and the classification of STCG versus LTCG are based on the FIFO method explained in the illustration above. That is how the FIFO method is applied for calculating capital gains on the sale of equity shares. The shares that are purchased first will presumed to be sold first and the logic will go in a chronological order. The same logic will be applied for every subsequent sale.