Listen to this article
The new taxation structure for Fund of Funds (FoFs) will be applicable from April 1, 2025. Under this, any gains arising from FoFs will be considered long-term after 24 months. Such long-term capital gains will be taxed in line with equity taxation, i.e., at 12.5% on gains.
Short-term gains on FoFs will continue to be taxed at the marginal rate of taxation, i.e., the investor’s income tax slab rate.
In contrast, pure debt schemes are taxed at slab rates regardless of the holding period.
Given this, three fund houses — Bandhan Mutual Fund, Kotak Mutual Fund, and UTI Mutual Fund — have recently launched Income Plus Arbitrage FoF schemes.
Since Income Plus Arbitrage FoFs invest in a combination of fixed income securities and arbitrage opportunities, these funds aim to provide steady income with lower volatility.
Simply put, this fund category is similar to debt funds but with additional tax benefits compared to pure debt funds.
Key features of Income Plus Arbitrage Funds:
- These funds invest in debt instruments like bonds and treasury bills, along with arbitrage opportunities in equities
- The arbitrage strategy ensures that the equity exposure carries minimal volatility risk
- Allocation to debt-based assets will always be less than or equal to 65% of total assets, while exposure to arbitrage-based equity mutual funds will be more than or equal to 35% at any point in time
- The maximum permissible TER (Total Expense Ratio) for this category is 2%
