Government will continue to support state-run Unit Trust of India's flagship US-64 fund by helping it redeem its units at a higher administered price, a top official said on Friday.

The move is part of the annual Budget presented by Finance Minister Jaswant Singh in Parliament.

Bombay-based UTI's US-64 scheme was at the centre of a controversy two years ago when the troubled fund manager froze redemptions for five months due to heavy withdrawals triggered by fears of a cut in dividend and buyback price.

UTI then withdrew the freeze following a nationwide uproar and announced a partial redemption facility that bought back the units at a much higher price than the net asset value.

The difference between the NAV and the higher repurchase price was funded by the government which later announced that UTI would be broken up into two companies, UTI-I and UTI-II.

"The government promises to provide the difference in the NAV and the redemption (price of US-64)," Finance Secretary S Narayan told reporters.

"As far as UTI is concerned there is enough provision in the budget. The government has promised that the liabilities consequent on the redemption of US-64 are a responsibility of the government and that will be fully taken care of."

The government also announced a 12.5 per cent dividend distribution tax on domestic firms and mutual funds. But equity schemes floated by mutual funds are exempt from the tax for one year.

Under the new rules, UTI-II will pay the dividend distribution tax, but UTI-I will be exempt because its liabilities have been taken over by the government.

UTI-I, which has assets of around $6.5 billion, consists of US-64 and the guaranteed return schemes which are facing liquidity problems because of bad debt and depressed stock markets.

UTI-II has the remaining NAV-based schemes that have a corpus of more than $3.0 billion.

Reuters