The Dividend Reinvestment (or IDCW Reinvestment) option automatically uses your IDCW payouts to buy more units in the same fund instead of sending the cash to your bank.
This is one of three IDCW sub-options: IDCW Payout (cash sent to bank), IDCW Reinvestment (cash used to buy more units), and IDCW Transfer (cash moved to another scheme in the same AMC). With the Reinvestment option, when IDCW is declared, the payout is used to purchase additional units at the NAV on that date. It mimics the effect of Growth option but with a tax twist — the IDCW is still taxable in the year it's 'received' even if reinvested.
Rather than getting the IDCW payout in your bank, this option buys more units for you with that money. While it sounds like Growth option, there's a key difference: the reinvested amount is still taxed in the year it's reinvested. In the Growth option, there's no such tax event — it's deferred until you redeem. So Dividend Reinvestment is generally less tax-efficient than Growth option.
When IDCW is declared, instead of sending money to your bank, the AMC buys new units at the current ex-NAV.
These new units are added to your folio at the lower post-ex-date NAV.
The reinvested amount is still treated as IDCW income — taxable at 10% for equity (plus cess) or at slab for debt.
Unlike Growth option (tax deferred to redemption), IDCW Reinvestment creates an annual tax event.