Tax planning guides Arbitrage funds
Arbitrage Funds: Park Short-Term Money Tax-Efficiently
Arbitrage funds buy shares in the cash market and sell them in futures at the same time, locking in the price gap. They carry low risk, and because they hold hedged equity, they are taxed like equity funds.
Arbitrage fund vs liquid fund
| Liquid fund | Arbitrage fund | |
|---|---|---|
| Invests in | Very short-term debt | Hedged equity plus debt |
| Tax, held under 12 months | Your slab rate (up to 30%) | 20% |
| Tax, held over 12 months | Your slab rate (up to 30%) | 12.5% above ₹1.25 lakh |
| Best holding period | A few days to months | 3 months or more |
| Exit load | Small, only in the first 7 days | Often charged for the first few weeks |
Example above: ₹20 lakh parked for a year, both funds assumed to earn 7% (₹1.4 lakh), investor in the 30% slab, tax including 4% cess.
When arbitrage makes sense
- Best for higher slabs: the tax edge matters most in the 20% and 30% slabs. In lower slabs a liquid fund may be just as good.
- Budget 2026 change: STT on futures rose from 0.02% to 0.05%, which may slightly reduce arbitrage returns.
- Good uses: business surplus, bonus money, property sale proceeds, or a base for an STP into equity.
Please note: This guide is investor education, not tax or investment advice. Figures are illustrations using assumed returns and are not guaranteed. Tax rules shown apply for FY 2026-27 (tax rules as of September 2026) and can change; please confirm your own situation with a chartered accountant. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
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