To pre-empt large redemptions in the Unit Trust of India's US-64 scheme in May 2003, the Centre has set the interest rate on bonds to be issued in lieu of the units to investors at 6.75 per cent a year.
The effective yield on the US-64 bonds will be 9.64 per cent for investors in the 30 per cent tax bracket because interest earnings have been exempted from income tax.
Government officials said the bonds would be tradable in the secondary market. "A high tax-free interest and secondary market tradability will prompt investors to stick to the scheme. The US-64 bonds will have better features than the RBI Relief Bonds," said an official.
The Centre has also decided to start two new series of Relief Bonds. The first will offer an interest rate of 8 per cent, but the interest will be taxable.
The second series will offer a lower but tax-free interest rate of 6.5 per cent a year. The effective yield on the latter set of Relief Bonds will be 9.29 per cent for investors in the 30 per cent tax bracket.
After the Budget for 2003-04, the government terminated fresh subscription to the 8 per cent and 7 per cent Relief Bonds from March 1.
While the earlier 8 per cent bonds were tax-free but subject to an investment ceiling of Rs 200,000, there was no limit to investment in the 7 per cent bonds.
The Relief Bonds, with a five-year tenure and semi-annual interest payments, cannot be traded in the secondary market. Officials said the idea was to make US-64 bonds more lucrative than instruments like Relief Bonds.
"Hence, the interest rate on the US-64 bonds is 25 basis points more than the 6.5 per cent Relief Bonds. Although the interest is tax-free in both cases, only US-64 units are tradable in the secondary market, making them more attractive for retail as well as institutional investors," said the government official.
The Centre has, nevertheless, provided Rs 6,500 crore (Rs 65 billion) in the Budget for US-64 redemptions in May 2003.
The provision was to honour the government's commitment to meeting the gap between the assured repurchase price and the net asset value of the flagship scheme, officials said.
The bond details
-
US-64 bonds: 6.75% per annum tax-free interest, secondary market tradable, effective yield 9.64% for investors in 30% tax bracket;
-
Relief Bonds-I: 6.5% per annum tax-free interest, non-tradable, effective yield 9.29% for investors in 30% tax bracket;
- Relief Bonds-II: 8% per annum taxable interest, non-tradable.
© 2026