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About Arbitrage Funds; Tax  Advantage of Arbitrage Funds


What is Arbitrage Fund? Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns.

Arbitrage funds are categorized as equity mutual funds for taxation purpose under the Income Tax Act, 1961. As a result, they are taxed @15% if held for less than one year and long term capital gains are tax-free.

Arbitrage mutual funds are near risk-free in nature and at the same time have certain tax advantage against debt mutual funds for investors falling in the highest tax bracket. This is because, debt mutual funds are taxed at the marginal rate of tax if held for a period of less than 3 years.

The following illustration will explain this:-

Particulars
For 0-1 Years
For 1-3 Years
Debt Funds
Arbitrage Fund
Debt Funds
Arbitrage Fund
Annual Return (Rs)
Rs.8,500/-
Rs.8,000/-
Rs.8,500/-
Rs.8,000/-
Applicable Tax Rate
30%
15%
30%
0%
Income Tax Payable
Rs.2,550/-
Rs.1,200/-
Rs.2,550/-
Nil
Post-Tax Return
5.95%
6.80%
5.95%
8.00%

 

  • The above illustration is based on an initial investment of Rs. 1,00,000/-.
  • It assumes that the investor falls in the highest tax bracket.
  • The returns on debt fund assumed at 8.50% p.a. and on arbitrage funds assumed at 8.00% p.a. However, these returns are not guaranteed.
  • The surcharge on income tax not considered.

It is evident from the above illustration, an investor in higher tax bracket can choose to invest in arbitrage funds over debt funds for generating higher post-tax returns.

At the same time, investors should note that the returns from arbitrage funds are volatile in nature. It vary depending upon the liquidity into the money market. Hence, it is suggested to review the investments in arbitrage funds regularly.

Various arbitrage fund schemes offered by Mutual Fund companies are Reliance Arbitrage Advantage Fund, ICICI Prudential Equity Arbitrage Fund, IDFC Arbitrage Fund, etc.

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One Response to Enjoy tax-advantage with Arbitrage Funds

  1. NIKHIL G. SHAH says:
    October 21, 2015 at 2:10 am

    Very good
    I also intrested in Arbritage Fund

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