Flashpoint Last Update On Tuesday, April 15, 2003
4 US-64: Chronology of events
4 New face of UTI
4 Another bail-out
4 US 64: To stay or quit?
4 US-64 liquidity package : FAQs
4 Returns on US-64 repurchase prices
4 US-64 : Not a bad deal
4 US-64 vs other balanced funds: A comparison
4 Deepak Parekh Committee Recommendations
4 US-64 rescue package: A panel discussion
4 UTI bail-out package: To bite or not to bite
4 Wither the trust?
4 US 64 sales and Repurchase prices - historical data.
4 US64: Top 10 holdings
4 A snapshot of the mutual fund industry
4 Other schemes mired in controversy
4 Will the US-64 story have a happy end?

US-64: A survivor’s guide

A lifeline just about keeps investors afloat

To check out or to stay

US-64 6.75% bonds offer tax-free income and liquidity

US-64, the flagship scheme of UTI 1, will be history. It will be laid to rest on 1 June 2003. In its place, the unitholders of US-64 will be offered five-year 6.75% tax-free bonds.

The bonds will mature on 1 June 2008. The rate of interest will be payable half yearly, and the interest income will be fully exempt from tax. Effectively, the annualised yield works out to be 6.86%. The bond is transferable and can be traded in the secondary market.

All investors who had purchased US-64 before 30 June 2001 will be entitled to get the bonds. Now this category of investors could be either ‘A’ category or ‘B’ category. ‘A’ category investors are ones holding up to 5,000 units as on 30 June 2001 and those who buy units classified as category ‘A’ from the secondary market on or after 24 January 2003. They are entitled for a repurchase price of Rs 11.90 (April 2003) and Rs 12 in May 2003. Category ‘B’ includes investors holding beyond 5,000 units on 30 June 2001 and those who buy units classified as category ‘B’ from the secondary market on or after 24 January 2003.

Investors who had purchased US-64 from the secondary market from 15 November 2002 to 23 January 2003(i.e. category ‘C’) are not covered under the special package and, hence, will not be entitled to these bonds.

Investors also have an option to convert a part of their investments into bonds and repurchase the remaining units. Irrespective of the fact whether an investor wants to go in for these bonds or not, he will receive the certificates of these bonds. But he can still exercise the repurchase option by surrendering the certificates latest by 31 May 2003. If he decides to exercise the repurchase option after this date, he will have to sell the units in the secondary market.

Against this backdrop, the scheme will work in the following manner. An investor has, say, 25,000 units of US-64. He will receive Rs 260000 (first 5000 units @ Rs 12 and balance 20,000 units @ Rs 10). Thus, the investor will then receive 2,600 (260000/100 with 100 being the face value of the bond) ) tax-free bonds. After 5 years, these Rs 260000 will accumulate up to Rs 362350. The interest of Rs 102350 will be totally exempt from tax.

As against this, if an investor decides to exercise the repurchase option and stash away the cash in a bank deposit, the amount that he will receive after 5 years will be Rs 353682 (assuming a 5 year deposit with SBI @ 6.25%). If an investor was to break his deposit, he would be charged a penalty. Out of the interest income of Rs 95090, he can claim a deduction of Rs 12000 under Section 80L.

Other investment option PPF has a coupon rate of 8% and the interest income is tax-free. But it cannot be traded in the secondary market. It can be withdrawn before its tenure of 15 years subject to a lock-in period of five years. Even the interest received on the Post Office Monthly Deposits which have a coupon rate of 8%, is subject to tax and is eligible for deductions under Section 80L.

For an investor falling in the highest tax bracket of 30%, the yield on the tax free bond will be 9.64%. For a corporate, the yield will work out to 10.38%. The returns are safe and assured as the bonds carry the sovereign guarantee of the government. The bonds do not have any lock-in period and can be freely traded in the market. High networth individuals are expected to be the buyers of these bonds in the secondary market, and, hence, there will be liquidity. Furthermore, in the current softening interest rate scenario, the bonds are likely to trade at a premium.

In contrast, the recently-launched 6.5% tax-free Savings Bond by RBI cannot be traded in the secondary market and has a lock-in period of 3 years.

The Finance Bill 2003 has introduced a new clause in Section 10 of the IncomeTax Act, 1961, to provide that any income arising from the sale and purchase of US-64 units would be exempt from the provisions of capital gains tax. It also adds that this amendment would be applicable to all such transfer of assets after 1 April 2002. Hence, US-64 units sold by an investor after 1 April 2002 will be exempt from capital gains. However, loss arising on sale or transfer of US-64 will not be eligible for setoff against capital gains on other taxable assets.

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