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THE withdrawal of the tax of 10 per cent on dividends distributed by mutual funds may provide a breather to the assured return income schemes. The softening interest rate regime had made it difficult for assured return schemes to match the high levels of return guaranteed years back. Since 1999, this task has been made more difficult by the 10 per cent tax on dividend distribution by debt funds, which has taken away part of the distributable surplus.

The UTI's MIPs, which offer pre-determined assured returns for one- or five-year tenures, were among the worst hit by the imposition of the dividend tax of 10 per cent in the Budget for 1999. For the MIPs that assured returns one year at a time, the UTI has been able to revise the annual dividend downward after imposition of the dividend tax. For instance, the assured return on the MIP 96 IV, which was recently redeemed, was pruned from 15 per cent in the first two years to just 5 per cent in 2000-01.

Though the NAV was below par at the time of redemption, the UTI explained this by calling attention to the dividend tax, which reduced returns from the scheme. After removal of the dividend tax, the assured return schemes may no longer be able to use the dividend tax to explain away the shortfall vis-à-vis the promised returns.

The biggest beneficiaries of the withdrawal in dividend tax could turn out to be the MIPs of the 1997 and 1998 series, which assured returns for five-year periods.

Though the interest rate scene has changed considerably since the launch of these schemes, they have been forced to distribute dividends at the promised rates of 11.75-14 per cent over their tenure.

The NAV of the schemes suggests that the UTI could be faced with a shortfall in these schemes vis-à-vis their par value, when they come up for redemption. With several of the 1997 MIPs coming up for redemption next year, the withdrawal of tax may have come a bit late in the day for these schemes. However, the MIPs in the 1998 series may be able to improve their performance in the remaining period before redemption.

Aarati Krishnan

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