What are Treasury Bills (T-Bills) and How Do They Work in India?

Treasury bills (T-Bills) are short-term debt instruments issued by the government to raise funds. They are considered one of the safest investment options in India, as they are backed by the full faith and credit of the government.

5,325 Views | Updated on: Oct 18, 2024

Plan ULIP Investment

Key Takeaways

T-Bills are short-term debt tools issued by the Government of India, with maturities of 91, 182, and 364 days.
They are safe, liquid, and low-risk investment options with guaranteed returns.
These are sold at a discount to their face value, and investors receive the face value at maturity.
These can be purchased through primary dealers or directly at auctions held by the RBI.
T-Bills can also be bought and sold in the secondary market.

Treasury Bills, or T-Bills, are financial instruments that provide good returns on investments. They might not be as flashy as stocks or as sophisticated as bonds. Still, they are essential tools for governments and investors alike.

If you are wondering what T-Bills are and how they work in India, you are in the right place. Let us dive right in!

What are Treasury Bills (T-Bills)?

Treasury Bills are government-backed short-term debt instruments. Think of them as IOUs (I Owe You) from the government. When you buy a T-Bill, you are essentially lending money to the government. In return, they promise to pay you back the face value of the bill on a specific date, which is usually less than a year from the issue date.

In India, T-Bills are available in the form of 91-day, 182-day, and 364-day bills. These numbers refer to the maturity period, which is how long you must wait to get your money back with interest. The longer the maturity, the higher the interest rate you can typically expect. Treasury bills interest rates are currently running in the range of around 6.7%-6.8%.

Why Does the Government Issue Treasury Bills?

Treasury bills are short-term debt obligations and money market instruments with a maturity of less than a year. T-bills are promissory notes issued by the government to guarantee repayment, raise short-term funds, and maintain the national debt. They also contribute to reducing the country’s overall fiscal deficit.

How Do T-Bills Work?

Treasury bills are issued at a discounted value, which is then redeemed at their original face value upon maturity. However, the returns from these securities depend on how liquid the economy’s financial situation is.

T-Bill Types and Maturities

There are three types of Treasury bill tenure:

91-day T-bills

They have a short maturity period.

182- day T-bills

They have a slightly longer maturity period than 91-day T-bills.

364-day T-bills

They have the longest maturity period.

T-Bill Yield Calculation

The yield on T-bills is calculated on an annual basis. By, comparing the par value to its face value and using the maturity period to convert the return you get the yield.

Y= (100-P)/P * [(365/D)*100]

where,

Y is the Yield

P is the discounted price of the T-bill purchased

D is the tenure

T-Bill Tax Considerations

T-bills are subject to short-term capital gains at rates applicable as per the income tax slabs of investors. No TDS is deducted from retail investors on redemption.

Ways to Buy Treasury Bills in India

As you know, T-bills are government-backed; they can be purchased in two ways. Let us take a look at them:

Through the Reserve Bank of India (RBI)

Open an online Retail Direct Gift Account (RDG) with the RBI and link it to your savings account. You can then bid in auctions held by the RBI occasionally. Let us look at the step-by-step guide for buying treasury bills directly through the RBI:

Open an online Retail Direct Gift Account (RDG) with the RBI.

Link your RDG account to your savings account.

Bid in auctions held by the RBI from time to time.

If your bid is successful, the RBI will allot you treasury bills.

The treasury bills will be credited to your RDG account.

You will receive the interest payments and maturity proceeds directly into your bank account.

Through the Primary and Secondary Markets

You have to go through the following steps to buy treasury bills through the primary and secondary markets:

Open a Demat account with a bank or broker.

Deposit funds into your Demat account.

Place an order to buy treasury bills on the stock exchange.

If your order is successful, the treasury bills will be credited to your Demat account.

You will receive the interest payments and maturity proceeds directly into your bank account.

Features of Treasury Bills

Treasury bills are short-term securities sold at a discount and redeemed for face value, providing risk-free returns. T-bills are highly liquid, backed by government credit, and yield lower interest rates than other investments.

Zero-Coupon Securities

Zero-coupon securities are sold at a discount rate and redeemed at their face value when they mature. They do not offer interest on deposits.

Minimum Investment

₹25000 or multiples of this amount is the minimum investment needed to buy treasury bills.

Guaranteed Returns

Treasury bills are redeemed at face value, offering guaranteed returns.

Advantages of T-Bills

T-Bills are like the reliable old friend of your investment portfolio. RBI issues them and is the safest investment option as they are liquid, provide guaranteed returns, and provide tax benefits. Here is why:

Safety

T-Bills are backed by the government, making them one of the safest investments.

Liquidity

You can easily buy and sell T-Bills in the secondary market, making them highly liquid investments.

Short-term

T-Bills have short maturities so that you can get your money back quickly.

Low Risk

Their short-term nature also means they are less affected by interest rate fluctuations than long-term bonds.

Limitations of Treasury Bill

The rate of return on Treasury bills is lower than that of other instruments. The auction process makes buying Treasury bills competitive as well. Here are some restrictions on Treasury bills that are mentioned below:

Low Returns

Treasury bills are zero-coupon securities issued at a discounted price. The interest you earn remains constant throughout the period, resulting in relatively low returns.

Taxation

Treasury bill returns are taxable as short-term capital gains tax at your respective tax brackets.

Affected by Inflation

Treasury bills are impacted by inflation. If the rate of return falls below the inflation rate, the real value of the returns decreases, diminishing your purchasing power.

What Influences T-Bill Prices?

Several factors influence prices, such as macroeconomic conditions, monetary policies, and the supply of treasury bills.

Here are some factors that influence the prices of treasury bills:

Market Risk

T-bill prices tend to fall as other assets rise, whereas, during the recession, investors invest in T-bills, increasing demand. They are affected by your risk tolerance.

Inflation

Rising inflation can reduce T-bill prices, allowing you to retain your purchasing power.

Funding Requirements of the Government

The government issues T-bills with the goal of raising capital to meet their short-term needs. This influences T-bill prices.

FAQs on Treasury Bills

1

What are the maturity terms of treasury bills?

Treasury bills have three maturity terms: 91 days, 182 days, and 364 days.

2

What kind of interest payments will I be paid If I own a treasury bill?

You will not receive any interest payment because treasury bills are zero-coupon securities traded at a discount to their face value.

3

Are T-bills a safe investment instrument?

T-bills are a safe investment instrument because they are issued by RBI.

4

What is the minimum amount needed to invest in Treasury Bills in India?

The minimum amount needed for investing in treasury bills in India is RS.25000, as per RBI guidelines.

5

How are Treasury Bills different from Treasury Bonds?

Treasury bonds are long-term debt instruments that provide consistent income, whereas Treasury bills are short-term debt instruments with lower returns.

Suggested Readings

1. What are Government Bonds? Meaning, types & Benefits.

2.What are the Best Investment Options for Beginners or Amateur Investors in India?

Written By :

Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Reviewed By :

Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

Kotak e-Invest

Features

Return of Mortality Charges*^$
Enhanced Protection
Multiple Plan Options
Zero Premium Allocation Charges
Tax Savings^

Want to Know More?

Invest NOW

Ref. No. KLI/22-23/E-BB/521

T&C

Calculator bookmarks

Term Insurance bookmarks

ULIP bookmarks

Savings bookmarks

Retirement and Pension Bookmarks

Investment Bookmarks

Buy Online

Select Login