Lesson 45 of 50 for advisers · Arbitrage funds · 3 min read · Reviewed 13 Nov 2026
An arbitrage fund holds at least 65% in listed Indian shares on the long side of its trades, hedged with futures. For tax, the 65% test counts listed shares and ignores the derivatives, so the fund qualifies as equity-oriented: 20% on gains within 12 months and 12.5% above ₹1.25 lakh after that.
An arbitrage fund buys shares and sells futures on them at the same time, earning the gap. SEBI requires at least 65% in equity and equity-related instruments.
For tax, a fund is equity-oriented if at least 65% sits in listed Indian shares, averaged over the year. The fund’s long share positions count; the futures don’t.
So gains are taxed like an equity fund: 20% within 12 months, and 12.5% above ₹1.25 lakh a year after that.
Key idea: Its spare cash may sit only in CDs, government securities of up to a year, and liquid or money market funds.
Try the short quiz on this page to check what stuck.
No, SEBI’s category rules exclude them.
Section 198(8) of the Income-tax Act 2025, which carries over 112A of the 1961 Act.
Its circular sets the current rules, with existing schemes in line by 26 Aug 2026.
For learning only, not investment advice. Built in India by a team that tracks its own money on Reva.