According to market experts, the 6.75 per cent US-64 bonds will be the only government-guaranteed instrument in the secondary market to offer tax-free returns.

None of the gilts offers tax-free interest. The bonds, with a face value of Rs 100 each, were expected to attract a significant premium, analysts said.

They pointed out that even if the bonds traded at Rs 150, the tax-free yield worked out to 4.5 per cent. The effective yield for a corporate paying 35 per cent tax with a 2.5 per cent surcharge would be 7 per cent. This was higher than the returns on a 10-year gilt at about 6.5 per cent, the experts said.

With US-64 bonds spread over a large number of unitholders, the new bonds could witness significant activity, Dhirendra Kumar, chief executive at Value Research, said. "A dispersed ownership pattern is likely to result in high activity," he said.

The only other instrument offering similar returns at present is the Relief Bond, or the savings bond. However, though it carries an interest rate of 6.5 per cent (25 basis points lower than US-64 bonds), it cannot be traded.

"Hence, banks and corporates would be interested in US-64 bonds," Kumar said. Trusts, charitable institutions and mutual funds enjoying a tax-free status might, however, prefer to exit.

Finance ministry officials said there were 200,000 accounts of large investors holding over 5,000 units.

These large accounts of high net worth individuals, corporates, banks, financial institutions and trusts, made up 55 per cent of the total outstanding units of US-64.

The total unit capital of US-64 stands at about Rs 10,900 crore (Rs 109 billion). Apart form high net worth individuals, the holdings of banks, financial institutions and corporates represent almost 25 per cent of the capital.

"So far, we have had only public sector bonds and one or two state government-guaranteed bonds in the market," Arun Kaul, managing director of PNB Gilts, a leading primary dealer, said.

Nabard recently issued tax-free bonds but the interest it offered was less than 5.5 per cent, Kaul said.