SBI savings pays 2.5% — barely matching inflation. SBI's 1-year FD pays 6.25%, but the interest is fully taxed at your slab. Arbitrage mutual funds typically deliver around the same pre-tax — 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.
Pre-tax growth · Savings interest compounds annually at the displayed rate. SBI FDs compound quarterly (industry standard for cumulative deposits). 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 under the new regime, plus 4% health & education cess. The §80TTA savings-interest deduction does not apply under the new regime. The §87A rebate (zero tax up to ₹12L) does apply to slab income but only if your full income (including this interest) stays at or below ₹12L; the moment you cross, the rebate disappears and the marginal slab kicks in.
Tax on arbitrage funds · Treated as equity-oriented under §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), surcharge above ₹50L income, and any state-specific quirks.
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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