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# What is the FIFO method used to work out capital gains tax on mutual funds?
- URL: https://www.clinkwealth.com/what-is-the-fifo-method-used-to-work-out-capital-gains-tax-on-mutual-funds/
- Published: 2026-11-03T09:37:52.000Z
- Updated: 2026-11-03T09:37:52.000Z
- Description: FIFO stands for "first in, first out." It means the mutual fund units you bought first are treated as the ones you sell first. Capital gains tax is worked out on that basis.
- Author: Vimal Chander Joshi
- Tags: mutual funds, capital gains, income tax

If you redeem your units after holding them for more than 12 months, you pay long-term capital gains (LTCG) tax. If you redeem within 12 months, you pay short-term capital gains (STCG) tax.

Most investors sell only part of their holding, and those units were usually bought at different times and at different prices. So how do you know which units you're actually selling today? The short answer is FIFO. The units you bought earliest are assumed to be the ones sold first.

**Why FIFO matters**

FIFO is the standard method for both shares and mutual fund units. It decides how long you held the units and how much profit you made on the sale.

Say you bought some units two years ago and the rest only two months ago. When you sell a part of them, it would be tempting to say you sold the recent ones, so you can avoid paying more tax. FIFO prevents that kind of confusion by fixing the order: earliest units go first.

This helps you work out two things:

1. **Holding period.** This tells you whether the gain is short-term or long-term.
2. **Cost of acquisition.** You need this to calculate the capital gain.

**Units and price are counted separately**

One thing to remember with FIFO is that the number of units and the price paid for them are tracked separately. For example, Mr X invests ₹10,000 through a SIP in one month and gets 100 units. The next month he invests ₹10,000 again and gets 90 units.

After two years, he sells 180 units for ₹40,000\. His capital gain is worked out as if he sold all 100 units from the first month and only 80 of the 90 units from the second month.

That looks easy enough. It gets confusing when an investor keeps buying more units at different prices over the years. FIFO clears this up by giving one fixed order for the calculation.