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Of the arbitrage and short-duration funds, which one is better for regular income?

Dhirendra Kumar suggests a mix of short-duration and arbitrage funds for an investor

Of the arbitrage and short-duration funds, which one is better for generating regular income? I fall in the 25% tax bracket according to the new tax structure.
- Mahendra

For regular income, debt funds are actually very attractive if your holding period is more than three years, as it gives you the benefit of indexation with 20 per cent tax. And if it is just for one year, then arbitrage funds are more attractive because these funds are treated as equity funds from the taxation point of view. So, one is liable for 10 per cent as long-term capital gains. So, make a bulk of your investment in a short-duration fund from which, you should not start withdrawing in initial years. And put a limited amount in arbitrage funds. By investing a dominant amount in a short-duration fund, a good part will be held over three years. This way, it will become very efficient, as after indexation, the tax incidence will be far lower on your regular income.