Arbitrage and liquid funds both earned 6.5%. Only one is taxed like shares
Over the past year, the typical arbitrage fund and the typical liquid fund returned within 0.02 points of each other. At the 30% slab, the tax on that return differs by about 15 points.
In the year to 13 November 2026, the median arbitrage fund's Direct plan returned 6.55% and the median liquid fund's 6.53%, from AMFI's NAVs. Arbitrage funds count as equity-oriented funds, so their gains are taxed at 20% within 12 months and 12.5% after. Liquid fund gains on units bought since April 2023 are taxed at the slab rate, up to 39% with surcharge and cess.
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Arbitrage funds held ₹2.97 lakh crore on 31 October 2026, from AMFI's monthly report. A year earlier they held ₹2.71 lakh crore. The number of folios rose from 7.05 lakh to 9.90 lakh over the same twelve months.
Investors put a net ₹34,139 crore into the category between April and October 2026. Liquid funds held ₹7.00 lakh crore at the end of October.
Two funds, one return
An arbitrage fund buys a share and sells the same share in the futures market at the same time. The gap between the two prices is the return, because the positions cancel out any move in the share price.
A liquid fund buys debt and money market instruments that mature within 91 days, as Motilal Oswal's liquid fund document sets out.
Compound took AMFI's published NAVs for 13 November 2025 and 13 November 2026. It compared the Direct plan, growth option, of every scheme in the two categories with a full year of NAVs.
| Category | Schemes | Median 1-year return | Lowest | Highest |
|---|---|---|---|---|
| Arbitrage | 34 | 6.55% | 5.04% | 7.58% |
| Liquid | 42 | 6.53% | 5.79% | 6.63% |
The medians are 0.02 points apart. The spread within arbitrage funds is wider: 2.54 points from lowest to highest, against 0.84 points for liquid funds.
The 65% that changes the tax
Under the Income-tax Act, 2025, an equity-oriented fund invests at least 65% of its money in shares of listed Indian companies. Section 198(8) sets the test, and it is measured on the annual average of monthly figures.
Zerodha's draft scheme document for its arbitrage fund plans 65% to 100% in shares under normal conditions. It lists the fund's tax as that of an equity-oriented fund:
- 20% on gains from units held 12 months or less
- 12.5% on gains from units held longer, on the part above ₹1.25 lakh a year
A liquid fund invests more than 65% in debt and money market instruments. Section 76 calls that a specified mutual fund. Gains on units bought on or after 1 April 2023 count as short-term however long they are held, so they are taxed at the slab rate.
What surcharge and cess add
The 30% slab applies to income above ₹24 lakh in the default tax regime. The Budget memorandum caps surcharge at 15% on equity capital gains. Slab income in the default regime can carry up to 25%. Cess of 4% goes on top of both.
Tax on every ₹100 of gain, default regime:
| Total income | Liquid fund | Arbitrage, up to 12 months | Arbitrage, over 12 months |
|---|---|---|---|
| ₹50 lakh to ₹1 crore | ₹34.32 | ₹22.88 | ₹14.30 |
| ₹1 crore to ₹2 crore | ₹35.88 | ₹23.92 | ₹14.95 |
| Above ₹2 crore | ₹39.00 | ₹23.92 | ₹14.95 |
The 25% surcharge in the last row applies when income other than equity gains and dividends is above ₹2 crore. In the old regime, surcharge on slab income above ₹5 crore is 37%, which makes it ₹42.74 per ₹100.
The ₹1.25 lakh exemption is one limit for the year. It covers long-term gains from listed shares and all equity-oriented funds together.
₹1 crore, one year
An illustration, using the two medians and the top row of the table. The investor's other income is above ₹2 crore, and the money stayed for exactly one year.
| Liquid fund | Arbitrage fund | |
|---|---|---|
| Return | 6.53% | 6.55% |
| Gain on ₹1 crore | ₹6,53,000 | ₹6,55,000 |
| Tax | ₹2,54,670 | ₹1,56,676 |
| Left after tax | ₹3,98,330 | ₹4,98,324 |
| After-tax return | 3.98% | 4.98% |
The gap is ₹99,994 on ₹1 crore, almost all of it from tax.
What the median leaves out
- The return moves. The gap between share and futures prices changes with demand for futures. Arbitrage funds ranged from 5.04% to 7.58% over the year.
- The 65% can slip. A scheme document can allow a defensive mix. Zerodha's draft scheme document for its arbitrage fund lets equity fall as low as 0% when arbitrage chances are thin. A fund whose yearly average falls below 65% is outside the equity-oriented definition for that year.
- Exit loads. Zerodha's draft charges 0.25% on units redeemed within 30 days. Each scheme sets its own load in its scheme document.
- Older liquid fund units. Units bought before 1 April 2023 and held over 24 months are taxed at 12.5%, not the slab rate.
- Flows swing. Arbitrage funds saw a net outflow of ₹21,114 crore in March 2026 and ₹3,956 crore in September.
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Questions
- How are arbitrage funds taxed in India?
- Arbitrage funds that keep at least 65% in listed Indian shares on an annual average count as equity-oriented funds. Gains are taxed at 20% within 12 months and 12.5% after, on long-term gains above ₹1.25 lakh a year, plus surcharge of up to 15% and 4% cess.
- How are liquid funds taxed?
- A liquid fund is a specified mutual fund under section 76 of the Income-tax Act, 2025. Gains on units bought on or after 1 April 2023 are short-term however long they are held, so they are taxed at your slab rate.
- What did arbitrage and liquid funds return in the last year?
- From AMFI's NAVs between 13 November 2025 and 13 November 2026, the median Direct plan returned 6.55% for 34 arbitrage funds and 6.53% for 42 liquid funds.
- How much money is in arbitrage funds?
- ₹2.97 lakh crore on 31 October 2026, across 40 schemes and 9.90 lakh folios, from AMFI's monthly report. A year earlier it was ₹2.71 lakh crore.
- Does every arbitrage fund keep its equity tax status?
- Only while it meets the 65% test on an annual average. Some scheme documents allow a defensive mix with less equity when arbitrage chances are thin.
Sources
- AMFI monthly report, October 2026
- AMFI monthly report, October 2025
- AMFI monthly report, September 2026
- AMFI monthly report, March 2026
- AMFI monthly reports, April to August 2026
- AMFI NAV history, 13 Nov 2025
- AMFI NAV history, 13 Nov 2026
- Memorandum explaining the Finance Bill, 2026, rates of income-tax and surcharge for tax year 2026-27
- Zerodha Arbitrage Fund, draft Scheme Information Document filed with SEBI (2026), asset allocation, exit load and taxation
- Motilal Oswal Liquid Fund, Scheme Information Document (29 May 2026), maturity up to 91 days
- WhiteOak Capital scheme information document filed with SEBI (July 2026), sections 76 and 198(8) of the Income-tax Act, 2025
Compound is analysis, not investment advice. Reva Money is not a SEBI-registered investment adviser.
