Why arp called a layer 2.5 protocol?

ARP Header is encapsulated with ethernet header and yes ip and mac are present in ARP header .

Any protocol carried with ethernet header is Layer 2.5 protocol.

CDP is carried with 802.3 Ethernet Header.

just adding 2 cents to this discussion.

ARP has always been a Layer 2 protocol. The reason: The highest layer addresses carried within ARP are Layer2 MAC addresses for typical ARP operation. The IP addresses in the ARP packets are protocol payload, no addressing information of the ARP packet itself.

ARP is a protocol that does not fit too well into the 7 layer OSI model or the ancient DoD layer model. These models were defined for end user applications like HTTP or FTP and they still define, how traffic is sent from application to application through a network stack (L3+L4) and a network interface (L2 + L1) down on the wire.

For me ARP is a service protocol that glues together layer 2 and layer 3 protocols. It solves the problem that you need to add a layer 2 (MAC) destination address over a shared media like Ethernet or Wireless LAN using IP packets. But ARP is a separate process with separate packets. You will find no ARP protocol information within an IP packet. This is the reason, why ARP is definitely not a layer 2.5 protocol.

You may define layer 2.5 protocols in a sense that additional protocols are added between layer 2 (Ethernet) and layer 3 (IP). But again, this is for end user traffic. A perfect example would be an MPLS header.

So you can use the OSI model for end user traffic perfectly well. For service protocols like ARP, RARP, routing protocols or even ICMP, the model is not too accurate.