The interesting part is that as per the CBDT any fund that holds more than 50% in equities is classified as an equity fund. The arbitrage fund buys equities and sells futures. Obviously, more than 50% of its asset allocation is to equities and therefore it is classified as an equity fund. That means the definition of long term in case of arbitrage funds is 1 year and long term capital gains are tax free in any financial year up to Rs.1 lakh. Any long term gains beyond that will be taxed at a flat rate of 10% without the benefit of indexation. It is this tax advantage that makes these arbitrage funds very attractive in post-tax terms.