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Tax break likely for UTI's closed-ended funds

P Vaidyanathan Iyer

The finance ministry is considering extending the tax exemption on dividends paid by the Unit Trust of India to close-ended funds in the forthcoming Budget. The exemption is now available only for open-ended schemes.

The ministry is also likely to continue with the tax exemption on open-ended schemes by another three to five years. The exemption expires on March 31, 2002.

UTI had launched several equity plans between 1992 and 2000 which were close-ended. Since the exemption did not cover the close-ended funds, UTI and other similar funds avoided paying dividends to the investors.

UTI has the maximum number of close-ended and open-ended equity or growth schemes. According to finance ministry sources, the tax exemption primarily aimed at providing relief to US-64 was provided in the 1999 Budget and was extended to only open-ended schemes, US-64 being an open-ended fund.

All open-ended equity schemes of other mutual funds were natural beneficiaries of the dividend tax exemption. Finance ministry sources said the move to extend the waiver was being considered to send a positive signal to the capital markets which are in a bad state today.

Sources said the move would also encourage retail investors to invest in growth-oriented mutual funds where the downside risk is low. The total corpus of all equity funds, excluding US-64, is pegged at about Rs 150 billion.

UTI, with a total corpus of about Rs 500 billion (including income and growth schemes), has the largest number of equity schemes. Besides the closed-ended equity plans launched between 1992 and 2000, the Trust also has several sector-specific funds which have an equity component of over 50 per cent.

At present, close-ended funds attract a 10 per cent dividend tax (excluding the 2 per cent surcharge) and the dividend is separately taxed at the hands of the investor too. While close-ended funds hardly pay dividends due to the tax incidence, not many open-ended funds declared any dividend in the last 12-18 months because of the poor state of the stock markets.

The continuation of the exemption would give a fillip to the lacklustre market and also a psychological comfort to the investors, sources said.

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