Explained: How to calculate capital gains tax on multiple demat accounts

Calculating capital gains tax on shares and mutual fund units can be a daunting task for many taxpayers, especially when dealing with multiple demat accounts and complex investment histories.

The key elements to consider when calculating capital gains are:

• Sale consideration: The amount received from selling the shares or units.
• Cost of acquisition: The original purchase price of the shares or units.
• Date of purchase and sale: Determines whether the gain is short-term or long-term.
• Short-term vs. Long-term Capital Gains

The holding period to classify a gain as long-term is 12 months. Gains earned on investments held for less than a year are considered short-term and are taxed at the applicable income tax slab. Long-term capital gains on equity shares and equity-oriented mutual funds enjoy a tax rate of 10% (with indexation benefits for those acquired before February 1, 2018).

"For long term capital gains on equity shares, one must remember to factor in the benefit of grandfathering the cost for shares purchased before 31st January 2018. If you have sold any shares which were bought before 31st Jan 2018, then the fair market value of such shares as on 31st Jan 2018 shall be considered as the cost of acquisition of such shares/units of equity oriented MFs," said Ritika Nayyar, Partner, Singhania & Co.

The Importance of Demat Account Consolidation

If you have multiple demat accounts, it's crucial to consolidate your investment data for accurate capital gains calculation. The FIFO (First In, First Out) method is generally used by the tax department to determine the cost of acquisition. This means the oldest shares are considered sold first. 

So  when you have sold some shares, the ones purchased oldest should be considered to have been sold first. While tabulating your data for gains calculations, this must be considered for correctness.

"“Section 45(2A) of the Income-tax Act, 1961 clarifies that in case of sale of shares held in dematerialized form, the cost of acquisition and period of holding of such shares would need to be determined on a FIFO basis (i.e., the shares which were first entered into the account will be deemed to be the first to be sold). However, a doubt may prevail in the minds of the investors as to how the FIFO rule is to be applied when the shares/securities are held by the investors in multiple Demat accounts. In this regard, the CBDT circular 768, dated June 24, 1998,  clarifies that in case of a taxpayer holding securities in multiple Demat accounts, the FIFO method is to be applied vis-à-vis each Demat account.  This clarification is based on the understanding that where a particular Demat account of an investor is debited for sale of securities, the securities lying in his other Demat account cannot be construed to have been sold as they continue to remain in that Demat account," said Kunal Savani, Partner, Cyril Amarchand Mangaldas.

The above can be further explained through an illustration. Say Mr. X holds 1000 shares of A Ltd in his two Demat accounts, namely ABC Demat a/c and XYZ Demat a/c. These shares were acquired by Mr. X as follows:

Now, if Mr. X sells 300 shares from his ABC Demat a/c, then the period of holding and cost of acquisition would be determined by considering 200 shares acquired in tranche A and 100 shares acquired in tranche C.”

Example 2:  Nayyar explains in detail:
Let's assume you have two Demat accounts (A and B) and you've invested in Company X.

Assume you have 100 shares of Company X purchased on January 1, 2023, at Rs. 100 per share in Demat Account A. On April 15, 2023, you buy another 200 shares of the same company at Rs. 120 per share in Demat Account B. On December 31, 2023, you sell 150 shares.

To calculate the capital gains, you would first consider the 100 shares from Demat Account A as sold first, followed by 50 shares from Demat Account B.

Grandfathering for Pre-2018 Investments

For shares purchased before January 31, 2018, the cost of acquisition can be indexed to inflation, potentially reducing your tax liability.

Calculation

Step 1: Determine the Cost of Acquisition (COA) for 150 Shares

As per the FIFO method, the oldest shares are considered sold first.

First 100 shares sold will be from Demat Account A.

COA for 100 shares = 100 shares * Rs. 100/share = Rs. 10,000

Next 50 shares sold will be from Demat Account B.

COA for 50 shares = 50 shares * Rs. 120/share = Rs. 6,000

Total COA for 150 shares = Rs. 10,000 + Rs. 6,000 = Rs. 16,000

Step 2: Calculate Sale Consideration

Assume you sold the 150 shares @ Rs. 150 per share.

Total Sale consideration = 150 shares * Rs. 150/share = Rs. 22,500

Step 3: Calculate Capital Gains

Capital Gains = Sale Consideration - Cost of Acquisition = Rs. 22,500 - Rs. 16,000 = Rs. 6,500

Step 4: Determine Short-Term or Long-Term Capital Gain

Since the holding period for all shares is less than 12 months, the entire gain of Rs. 6,500 is Short-Term Capital Gain (STCG). 

Step 5: Compute Tax Liability

The tax rate for STCG is currently the same as your income tax slab.

This is a simplified example. Actual calculations might involve more complex scenarios, such as multiple purchases and sales, dividends, and tax deductions. It would be advisable to consult a tax professional for assistance in case of complex calculations.