Equity-Oriented on WebNotes

Taxation of arbitrage funds (equity-oriented)

Tue, 12 May 2026 00:00:00 +0000

Taxation of arbitrage funds in India mirrors the taxation of equity-oriented mutual funds because SEBI mandates that arbitrage funds maintain at least 65% of their assets in equity (through simultaneous long cash and short futures positions), placing them within the equity-oriented classification for income-tax purposes. Capital gains on arbitrage fund units are taxed under Section 111A (STCG at 20%, effective 23 July 2024) if held for 12 months or less, or under Section 112A (LTCG at 12.5% above Rs 1,25,000) if held for more than 12 months. This tax treatment makes arbitrage funds materially more efficient than liquid funds or ultra-short-duration debt funds for investors in higher income-tax brackets, especially for parking short-term surpluses for periods of three months or more.

Taxation of Fund of Funds (revised 2024)

Tue, 12 May 2026 00:00:00 +0000

Taxation of Fund of Funds (FoFs) in India was revised by the Finance Act 2024, effective 23 July 2024, to create a favourable classification for domestic equity FoFs that invest predominantly in equity-oriented domestic mutual funds. Under the pre-2024 framework, all FoFs – regardless of whether they invested in equity or debt underlying funds – were classified as non-equity and taxed either under Section 112 (LTCG with indexation, pre-April 2023) or as specified mutual funds at slab rate (post-April 2023, per Finance Act 2023). The Finance Act 2024 introduced a new sub-category: a domestic equity FoF that invests at least 90% of its assets in equity-oriented domestic mutual funds now qualifies as equity-oriented and is taxed under Sections 111A and 112A like a direct equity mutual fund.