Under this option, no dividend is declared and the Net Asset Value moves up and down depending on the market movement. You end up paying tax only when you sell your units. The rate of tax depends on the period for which you held the units. Let's say you sold your units (redeemed them) within 12 months of buying (date of investment). You will have to pay short-term capital gains. This is a flat rate of 10%. If you redeem the units after 12 months, you will have to contend with long-term capital gains. As per the current tax laws, this is nil. in dividend reinvestment-Under this option, the fund declares a dividend and reinvests it into the fund. The point to be noted is that the entire tax-free dividend amount is reinvested on a particular day, which in a way is timing the market. Considering that timing the market is not a strategy that works all the time, re-investment option may not prove effective at all times.
