Capital gain is calculated as the difference between the redemption price (NAV price at which mutual funds are sold) and purchase price (NAV value at which mutual fund units are bought). All of the computations are done on the basis of First in First out (FIFO).

Accounting of new mutual fund units added through dividend reinvestment in capital gains computation

In case of mutual fund units are added to your account by opting for dividend reinvestment plan then purchase price for such units is taken as 0 for the computation of capital gains done on the basis of FIFO.

In the above cited example, investor makes a short term capital gain on selling mutual fund units that were held for less than a year of Rs. 8200/- as the total cost of the units will be (10000 + 50*14)= 10700 and the redemption value is 18900. In the case when he sells the remaining 50 units after a holding period of over 1 year, he makes long-term capital gain of Rs. 300 as total purchase value for 50 units equals Rs. 700 and the redemption value considering the NAV value of that particular day will be Rs. 1000.

If you opt for dividend payment, there is no tax since dividend are tax free in the hands of investors. Dividend distribution tax is payable by the company or mutual fund.

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