This move was a reaction to a proposal in Budget 2000 which has doubled the tax on dividend distributed by a mutual fund for a debt oriented scheme from 11% to 22%. The provision comes into effect in the current financial year 2000-01. UTI had not factored this tax outgo into its promised rate of return in most of its MIP’s prior to 1997. Thus investors will now get returns assured minus the tax paid by the trust on the dividend distributed by it.

The hugely popular MIP or Monthly Income Plans of the UTI are normally 5-7 year close ended income plans, which invest mainly in debt instruments (80% investment in debt). They usually have three options - Monthly Income option, Annual Income option and cumulative option. The income distribution is tax-free in the hands of investors. The Units are sold at face value of Rs.10/- and offer opportunity for availing capital gains tax exemption under section 54EA of Income Tax Act, 1961 for investment of sale proceeds arising out of transfer of long term capital assets, sold/transferred before 1st April, 2000, provided such investment is made within six months of such sale/transfer. The units of the various MIP’s are listed on the Wholesale Debt Segment of the NSE within six months of closure of the scheme and investors have the option of exiting the plans at NAV based repurchase prices.

The earlier schemes were for 5-7 years, though now the tenure is limited for 5 years and lesser. Also till 1998 UTI was allowed to assure the returns for the full tenure but since 1998 SEBI directed UTI to declare returns on an annual basis. Before the Budget 2000, UTI was expected to pay a tax of 10% before declaring dividend but in this budget the limit was raised to 20% plus surcharge. Thus this move to pass on the tax burden to the investors.

So what does this mean for the investor of MIPs? Explained simply it means that where UTI paid 10% tax on its income before declaring dividend, it will now have to pay 22% tax and then declare the dividend. Thus to pay Rs 100 dividend UTI will now have to earn Rs 128.21. In its latest MIP schemes UTI has declared the assured return only for one year and the rate of income distribution would be announced in advance in March every year. So say the return of the MIP-2000 (Monthly) is assured at 9.26% (in the monthly option), for 2000-2001 then the return for next year will be announced by March 2001 and it could vary between 9-9.26%.

 And how does this move affect the attractiveness of MIP as an investment instrument? A look at the comparative table given above shows that due to the capital appreciation factor and a high post tax return MIP’s still are an attractive option for the high tax bracket person, because their pre tax yield (for MIP 2000) would be in the range of 12-13%. So in an era of falling returns and higher taxes the MIP’s still hold their own in the debt instruments market.