The Unit Trust of India will issue government-guaranteed bonds to US-64 unit holders in May carrying a tax-free coupon rate of 6.75 per cent, the government said.

They will be "freely tradeable" in the open market and redeemable after five years, Finance Secretary S Narayan told reporters.

US-64 unit holders will have the option of surrendering their certificates for the tax-free bonds, which represent, at current market rates, "a very encouraging investment opportunity", Narayan said.

In case of odd lots of units worth less than Rs 100, the unit holders would be paid the amount in cash, joint secretary, U K Sinha, said. 

For corporate investors falling in the 35 per cent tax bracket, the bonds would give an effective return of 10.52 per cent while it would be 10.07 per cent for high networth individuals. 

Small investors paying taxes at the rate of 10 per cent, the yield from the bonds come to 7.5 per cent.

The cash option is that all investors holding upto 5,000 units since June 2001 would be redeemed at Rs 11.80 a unit in March or Rs 12 a unit in May. 

Investors holding more than 5,000 units would get Rs 10 per unit for additional units in May 2003.

Those investors, who do not opt for the cash option, would be offered bonds by default. They can, however, encash it within May 31.

Any dividend earned by US-64 would be passed on to the investors tax-free, Narayan said, adding the transactions of the flagship scheme would be exempted from capital gains tax.

"The US-64 scheme as well as several assured return schemes along with other specified assets have moved to a government managed entity -- Specified Undertaking of UTI," Narayan said.

He said the government was committed to meet the shortfall if the net asset value was less than the assured return.

"Necessary budget provisions have been provided in the current year as well as in 2003-04," he added.

Finance Minister Jaswant Singh has allocated Rs 3,500 crore (Rs 35 billion) for bonds and Rs 3,000 crore (Rs 30 billion) for cash redemption in the Budget for 2003-04.

Additional inputs: PTI