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CGGF: Will UTI Honour it?

With the government paving a way for bifurcation of UTI, the same should come as a relief to investors in Children's Gift Growth Fund (CGGF). So all promises as to assured returns are expected to be met.

My client has Rs 1.5 crore invested in the Unit Trust of India Children's Gift Growth Fund (CGGF). The scheme guaranteed an assured return of 12 per cent compounded annually till the beneficiary turned 18 or 21. Will this guarantee be honoured? Also, CGGF was originally tax exempt under section 10(33) of the Income Tax Act, which has now been abolished. What is the tax status of the investment?
Chetan Gill

This scheme does not have an exit route — the amount invested cannot be redeemed until the child reaches the age of 18 years. It assures a 12 per cent annual return, which is reinvested. With UTI's restructuring, all assured schemes will be managed by an administrator appointed by the government. If you accept the government's guarantee — and there isn't any reason not to do so — then you'll get 12 per cent, a healthy return for a guaranteed investment.

If the government reduces the assured return of 12 per cent, it is likely that it will provide for early redemption. Your best guarantee is the huge number of people who have invested in this scheme — any future government would probably find the financial cost of honouring this guarantee easier to bear than the political cost of not honouring it.

The tax issue is trickier. As the law changes, the taxation structure of the scheme has to change. In Budget 2002, section 10(33) of the Income Tax Act has been omitted and section 115R has been modified to put the dividend burden on investors. So from assessment year 2003-04, the assured return of 12 per cent will be taxable in the hands of the unit holder and the normal deduction under section 80L can be claimed for Rs 9,000. The rest would be taxed at the marginal tax rate. As the assured return becomes taxable, the previously invested amount would be reduced by the tax deducted at source (TDS) on the dividend, unless form 15H is submitted. Long-term capital gains will be applicable and prevailing tax rate at the time of redemption.

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