A typical savings account pays around 2.5% — barely matching inflation. A 1-year FD pays around 6.25%, but the interest is fully taxed at your slab. Arbitrage mutual funds typically deliver a similar pre-tax return — but get taxed at 12.5% LTCG flat (after the ₹1.25L annual exemption). For anyone in the 20% slab or above, the post-tax gap is real money. See it in your own numbers below.
Not sure how to actually make the switch? A quick conversation — no pitch, just walking you through how arbitrage funds work, when they fit, and when they don't.
Pre-tax growth · Savings interest compounds annually at the displayed rate. FDs compound quarterly (industry standard for cumulative deposits at scheduled banks). Arbitrage funds compound annually at the assumed return rate.
Tax on FD and savings interest · Both are added to your total income and taxed at your marginal slab, plus 4% health & education cess and applicable surcharge (10% above ₹50L income, 15% above ₹1Cr, 25% above ₹2Cr on slab income). Under the old regime, Sec. 80TTA gives you ₹10,000/yr savings-interest deduction (or Sec. 80TTB gives ₹50,000/yr combined interest deduction for those 60+). Under the new regime, neither applies. The Sec. 87A rebate wipes tax to zero if your full income (including this interest) stays at or below ₹12L in the new regime, or ₹5L in the old regime; the moment you cross, the rebate disappears and the marginal slab kicks in.
Tax on arbitrage funds · Treated as equity-oriented under Sec. 111A / 112A:
12.5% flat + 4% cess = 13% effective. First ₹1.25 lakh of LTCG (across all equity gains in the FY) is exempt.20% flat + 4% cess = 20.8% effective. No ₹1.25L exemption.What the tool does not model · Exit loads (typically 0.25-0.5% for arbitrage funds redeemed within 15-30 days), expense ratios (already netted in the assumed ~6.5% category average), TDS on FD interest above ₹40K (it's a prepayment, not extra tax — final liability is what matters), and any state-specific quirks. Surcharge IS now modelled (10% above ₹50L, 15% above ₹1Cr, 25% above ₹2Cr on slab income; capped at 15% on equity LTCG/STCG).
Why this often surprises people · An FD and an arbitrage fund can show similar pre-tax returns, but for anyone in the 20% slab or above, arbitrage funds keep meaningfully more of the gain because they're taxed at 12.5% LTCG instead of your slab rate. And against savings at 2.5%, both are dramatically better — yet most people leave 6-figure balances idle for years.
They are low-risk, but not zero-risk. Here's what we tell every client before recommending them:
Where arbitrage funds excel: as a parking spot for short-to-medium-term money (12-36 months) where you'd otherwise use an FD or worse, leave it in savings. For emergency funds you might need tomorrow, savings still wins on liquidity.
A 20-minute call where we look at your bank statements, identify how much idle cash is leaking returns, and pick the right combination of arbitrage funds, ultra-short funds, and FDs for your situation.
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