SID
Companhia Siderurgica Nacional S.A. (CSN)
stock NYSE ADR

Taxation wise, Arbitrage Funds are indeed superior to Debt Funds or FD's indeed.
As for the catch, there are a few I can think of.
1.) Like all other mutual funds, Arbitrage Funds lack the "safety feature" i.e. the DICGC insurance of upto ₹ 5 lakhs that is provided to Fixed Deposits in case of losses. No such things exist in Mutual Funds.
2.) Another thing is the ease of taking loan against an FD vs an Arbitrage Fund or any other mutual fund for that matter
3.) Arbitrage Funds also suffer from Credit Risk. If the underlying bonds of the debt portion of the Arbitrage fund aren't good & default for any reasons, returns can go negative for a good period. We saw this happen with Principal Arbitrage Fund (now Sundaram Arbitrage Fund) in 2018.
4.) Returns in Arbitrage Funds depend mostly on the spread in the costs of the underlying stocks in Future & Spot market (ideally they should have been called Cash n Carry Funds IMO). Now during bear markets or when such Arbitrage opportunities are less, such spreads decrease & as a result returns decrease as well & can go even negative for a quarter. We saw this happen in 2020.
5.) To avoid the above situation, SEBI, after 2020, introduced a provision for Arbitrage Fund to go from 0-35% debt to 65-100% debt when such "distressed situations" happen. You will find more details in the SID of your fund. The tax advantage of Arbitrage Funds may be taken away during these times. Thankfully this hasn't happened till now.
6.) Unlike Overnight & Liquid Funds, the NAV of Arbitrage Funds fluctuate more with almost 1-2 days in a week having a negative 1 day return. Those who obsess about Emergency Money being kept in safety might not prefer this.
7.) For longer terms more than 3 years, other than tax advantages, Arbitrage Funds may lose out on post tax returns other kinds of funds like CHF, Gilt Funds, Equity Savings Funds, etc so many people prefer those for long term debt allocation.
These are few of the reasons I can think of right now. That's all the catch there is.

Taxation wise, Arbitrage Funds are indeed superior to Debt Funds or FD's indeed.
As for the catch, there are a few I can think of.
1.) Like all other mutual funds, Arbitrage Funds lack the "safety feature" i.e. the DICGC insurance of upto ₹ 5 lakhs that is provided to Fixed Deposits in case of losses. No such things exist in Mutual Funds.
2.) Another thing is the ease of taking loan against an FD vs an Arbitrage Fund or any other mutual fund for that matter
3.) Arbitrage Funds also suffer from Credit Risk. If the underlying bonds of the debt portion of the Arbitrage fund aren't good & default for any reasons, returns can go negative for a good period. We saw this happen with Principal Arbitrage Fund (now Sundaram Arbitrage Fund) in 2018.
4.) Returns in Arbitrage Funds depend mostly on the spread in the costs of the underlying stocks in Future & Spot market (ideally they should have been called Cash n Carry Funds IMO). Now during bear markets or when such Arbitrage opportunities are less, such spreads decrease & as a result returns decrease as well & can go even negative for a quarter. We saw this happen in 2020.
5.) To avoid the above situation, SEBI, after 2020, introduced a provision for Arbitrage Fund to go from 0-35% debt to 65-100% debt when such "distressed situations" happen. You will find more details in the SID of your fund. The tax advantage of Arbitrage Funds may be taken away during these times. Thankfully this hasn't happened till now.
6.) Unlike Overnight & Liquid Funds, the NAV of Arbitrage Funds fluctuate more with almost 1-2 days in a week having a negative 1 day return. Those who obsess about Emergency Money being kept in safety might not prefer this.
7.) For longer terms more than 3 years, other than tax advantages, Arbitrage Funds may lose out on post tax returns other kinds of funds like CHF, Gilt Funds, Equity Savings Funds, etc so many people prefer those for long term debt allocation.
These are few of the reasons I can think of right now. That's all the catch there is.