Tax Saving Scheme: You can save lakhs of rupees in tax by investing in this scheme, know how
Income Plus Arbitrage FoF is a mix of debt fund and arbitrage fund. It can invest up to 35 percent in debt fund. It can invest the remaining 65 percent in arbitrage. The main objective of this fund is to reduce the tax liability of investors.
Tax Saving Scheme: Do you not want to invest in debt funds because of bad tax rules? If yes, then there is good news for you. Income Plus Arbitrage FoF will solve your problem. Asset management companies have launched this fund to reduce the tax burden on investors. This scheme can help you save lakhs of rupees in tax. Let’s know how.
What is Income Plus Arbitrage FoF?
Income Plus Arbitrage FoF is a mix of debt fund and arbitrage fund. It can invest up to 35 percent in debt fund. It can invest the remaining 65 percent in arbitrage fund. The main objective of this fund is to reduce the tax liability of investors. In the last 6-7 months, the interest of many fund houses has increased in such funds. Some fund houses are going to launch such schemes now, which include debt and arbitrage strategies.
What is the objective of this fund?
At the end of April 2025 this year, the total asset under management of this scheme category was Rs 3,161 crore. The objective of this fund is to generate higher returns than traditional liquid or short term debt funds. Due to investing up to 65 per cent in arbitrage, the tax rules of equity funds apply to this fund. This reduces the tax burden on the investor. In the Union Budget 2023, the government changed the tax rules of debt funds. This increased the tax on the returns of debt funds, which reduced the attractiveness of this fund.
Why did the AMC introduce this fund?
In the Union Budget 2023, the government changed the tax rules of debt funds. According to this, the investor will have to pay tax on capital gains from debt funds as per his tax slab. This means that if an investor falls in the 30 percent tax slab, then he will have to pay 30 percent tax on the returns of debt funds. Due to paying so much tax, the actual return on investing in this fund gets reduced significantly.
What are the tax rules?
The tax rules on the gains of equity funds are different. Long term capital gains tax rules apply when this fund is sold after 2 years of investment. Long term capital gains are taxed at 12.5 per cent. In the Union Budget presented in July 2024, the government changed the tax rules for FoF category funds. The government said that a tax of 12.5 per cent will be applicable on long term capital gains of FoF. There are only two conditions for this. First, the investment in it has to be maintained for at least 2 years. Second, its investment in debt funds should not exceed the prescribed limit.
Which companies introduced this scheme?
Asset management companies took advantage of this rule and launched new FoFs or tried to change their existing schemes according to this rule. Many AMC companies including SBI Mutual Fund, Nippon Fund, Bandhan have introduced schemes of this category. Investors who want to invest in debt funds are showing more interest in this scheme.
This is how investors benefit
Suppose you get a long term capital gain of Rs 1 lakh by investing in a debt fund. According to the tax rules, if you fall in the 30 percent income tax slab, then you will have to pay a tax of Rs 30 thousand on it. Suppose by investing the same amount in an income plus arbitrage fund, you get a long term capital gain of Rs 1 lakh. So on this Rs 1 lakh, you will have to pay only 12.5 percent tax, which will be only Rs 12.5 thousand. This is much less than the tax of Rs 30 thousand on a debt fund. If your capital gain is in lakhs, then your tax savings will also be of lakhs.
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