Question

How are arbitrage fund gains taxed?

Accepted Answer

As equity fund gains — STCG at 15% for holdings up to 12 months and LTCG at 12.5% (above ₹1.25 lakh) for holdings above 12 months — Arbitrage funds maintain at least 65% in equity and equity-related instruments (combining spot equity purchases and short futures positions). Since equity allocation exceeds 65%, they are classified as equity-oriented for tax purposes. STCG at 15% applies for holding < 12 months; LTCG at 12.5% (above ₹1.25 lakh) for holding > 12 months. This makes arbitrage funds tax-efficient alternatives to liquid funds for investors in higher tax brackets.