Treasury Bills (T-Bills): Meaning, Features, Benefits & How to Buy

In a sovereign nation like India, it is not only individuals and institutions, but the Government and the central governing authorities also avail loans to fund various operations. The RBI, on behalf of the central government, raises funds by auctioning government securities to trusts, businesses, banks, insurance companies, eligible provident funds, state governments and financial institutions. Even retail investors are also allowed to participate in such auctions.

Treasury Bills are government securities that help the government meet their short-term capital requirements while providing fixed income to investors. Apart from playing a passive role in assisting the government in raising funds, you can also make a small profit on your investment, making it a win-win situation for all the stakeholders.

In this article, you’ll learn about the meaning of Treasury bills or t-bills, their features, benefits, types, interest rates, how to buy them, and all the points you must know before investing.

What is a Treasury Bill?

A treasury bill (T-bill) is a short-term money market instrument that the central government issues to raise capital for various welfare activities and meet its day-to-day obligations. Unlike government bonds, the tenure for treasury bills is relatively short and are presently issued in three tenures, namely 91 days, 182 days and 364 days. The government uses them for short-term liquidity requirements. Only the central government can issue treasury bills; the state governments cannot.

Unlike most other government securities, T-bills have no concept of interest. Instead, you can purchase treasury bills at a discounted price for a specific holding period and redeem them at the full face value on maturity. This means you will earn an assured return when you receive the principal back at the end of the tenure.

For example, if you buy a 91-day tenure treasury bill at INR 97, the face value is INR 100. Then, at the end of 91 days, you will receive INR 100. Your return is the difference between the maturity or face values (INR 100) and the issue price (INR 97), i.e. INR 3.

Guaranteed returns differentiate this from other instruments, such as equity and mutual funds. However, it is pertinent to note that the returns are relatively lower.

Why does the Government issue Treasury Bills?

Governments need liquid capital to fund various short-term development and welfare projects. Through Treasury bills, they can raise capital from various set of investors like trusts, institutions, banks and retail investors. Treasury bills are also popularly called “Zero-coupon security”. The RBI runs and regulates the entire operation. Hence, it is considered to be a secure and guaranteed investment instrument. 

How do T-bills work in India?

In India, Treasury Bills (T-bills) serve as short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the government. These financial instruments are designed to meet the government’s short-term funding requirements and help manage liquidity in the financial system. T-bills are typically offered in three different maturity periods: 91 days, 182 days, and 364 days, allowing investors to choose the most suitable option based on their investment horizon. Unlike traditional bonds, T-bills are sold at a discount to their face value, with the difference between the face value and the purchase price representing the investor’s return. Interest is not paid periodically; instead, it is realised at maturity.
T-bills are known for their safety, backed by the Indian government’s creditworthiness, and they offer high liquidity, as they can be traded in the secondary market before their maturity date. Investors should consider their tax implications, as T-bill income is subject to taxation according to the investor’s tax slab and holding period. Overall, T-bills provide a secure and liquid investment option for individuals and institutions, contributing to diversifying investment portfolios.

Features of Treasury bills

Here’s a rundown of the key features of  treasury bills:

• The minimum investment amount when purchasing treasury bills is INR 10,000. If you want to purchase over and above this amount, you will need to do it in multiples of INR 10,000. 
• Treasury Bills have no concept of interest or dividend and work on a completely different mechanism. Treasury bills are issued at a discounted price. When the principal is paid back to the investor after the holding period, he/she receives it at the full face value.
• This is a short-term debt instrument with a maximum tenure of 364 days.
• On behalf of the central government, the RBI auctions treasury bills every Friday  for 91-day via authorised commercial banks and registered primary dealers. Retail investors can bid and purchase them directly by opening a Retail Direct Scheme Account with the RBI. For 182-day and 364-day treasury bills, the auction is announced on alternate Wednesdays.
• Treasury bills can be issued in a physical form as a promissory note or dematerialised form by crediting to the Subsidiary General Ledger Account.

Types of T-bills Based on Maturity

There are 3 types of T-bills based on tenure. The list is as follows:

• 91-days
• 182-days
• 364-days

The RBI conducts the auctions of T-bills. The tenure remains constant, and the discount rate and face values change depending on the number of bids, RBI policy and funds requirements.

How to Calculate the Yield Rate of T-Bills?

Let us understand how to calculate the return on investment. Say you purchase a treasury bill for INR 97 for 91 days and receive INR 100 on maturity; the yield is as follows:

Yield rate is the return on an annualised basis in percentage (Y)
Purchase price (PP)
Days to maturity (DM)

Y = [100-PP]/[PP] * [365/DM *100]
= [3/97] * [365/91 *100]
= 0.03092 * 401.098
= 12.40 %
The T-bill provides a return on investment of 12.40 per cent, but you will receive this return proportionally because you held it for 91 days.

The yield rate for every treasury bill is visible on the RBI website for every weekly auction and type of treasury bill.

• No tax is deducted at source when investors receive the principal amount back post-tenure. However, short-term capital gains earned through T-Bills are subject to the STCG tax at applicable rates per your income tax slab.
• The rate of return on treasury bills fluctuates, sometimes on a weekly basis. This is because, like other debt securities, the price and return of T-bills are affected by factors such as macroeconomic conditions, inflation, and monetary policy. For instance, the rate of return was generally higher in 2022 than for those issued in 2021.
• Once the treasury bills mature, the government debits the security units held from your Demat account after crediting the payable amount into the Demat-linked bank account. This process is known as ‘Extinguishment of Securities‘.

Who should invest in Treasury Bills?

The following investors should invest in T-bills:

• Secure and liquid investment: For those who are looking for an investment in less risky and liquid instruments, T-bills are ideal for them. Being government-backed, the risk of default is less, and their high liquidity ensures easy trading.
• High Returns: T-bills offer higher returns than other securities in the short term, making them suitable for individuals looking for relatively higher returns without risk.
• Short-term security: T-bills are well-suited for individuals saving for short-term goals, such as making an EMI payment. The relatively shorter maturity period ensures that these funds will be available when needed to fulfil their financial objectives.

How to Buy Treasury Bills in India?

We’ve got you covered if you need clarification about where to buy Treasury bills in India. You can place a bid both via the RBi website and through the secondary market. The process is as follows:

Through the RBI Website:

1. RBI issues an auction calendar informing about the borrowing, tenor range and auction duration of Treasury bills. During the auction duration, bids can be placed on the electronic platform of RBI called E-Kuber, the Core Banking Solution (CBS) platform of RBI.
2. Further, Retail investors can also bid and purchase treasury bills directly by opening a Retail Direct Scheme Account on the RBI website. Once you have successfully created the RDG Account, it will be available for primary market participation and secondary market transactions.

Through your Demat Account:

1. If you have a Demat account, visit the FD/Bonds section, which allows you to bid on treasury bills every Wednesday. One can also buy treasury bills on the secondary market via a broker.
2. You can also purchase money market mutual funds, which invest in treasury bills. Here, you are not directly investing in them but via a mutual fund managed by a fund manager whose primary role is capitalising on market opportunities.

Advantages of Treasury Bills

Treasury bills are a unique type of debt-based instrument offered by the Government of India. They come with several advantages for retail investors. Here’s a rundown of the top three advantages of treasury bills:

Risk Free

Since the government issues treasury bills via RBI, the maturity risk is zero. It belongs to the debt-based asset class, considered highly safe and secure. At the end of the tenure, you will receive back your principal amount at its face value. The rate of return, however, can vary every time the government announces fresh bids.

Liquidity

Unlike other investments such as government bonds, public provident funds, fixed deposits, savings certificates, and post office savings accounts, the tenure for treasury bills is 91 days, 182 days and 364 days. Hence, you need not stay invested for long periods to earn returns. Also, T-bills can be sold in the secondary market, allowing you to easily convert your holding into cash during an emergency. 

Bidding

As a retail investor, you can make a non-competitive bid to be eligible to purchase treasury bills. This means you do not have to quote the yield rate or price. Hence, this allows you to purchase a treasury bill without the pressure of competing for the highest face value or yield rate. Once the bids are placed, you will come to know within a week if your bid was accepted in the particular issue. If it gets accepted, the payment must be made the following Friday.

Disadvantages of Treasury Bills

Relatively Low  Returns

The primary limitation of a treasury bill is that despite the security aspects, the potential to generate higher returns and create long-term wealth is limited. The returns expected are relatively low, ranging between 3.39% to 6.63%, based on the holding period of the treasury bill.

Taxable profits

The profits earned are taxed as short-term capital gains that must be added to overall income and taxed as per the income bracket. Treasury bills also do not offer any tax deduction under Section 80C of the Income Tax Act, of 1961.

Factors That Can Influence the T-Bills Price

• T-Bill Interest Rates: When the interest rates on T-bills go up, the prices of T-bills you already have tend to decrease. This happens because people can get better returns elsewhere. On the other side, when T-bill interest rates go down, the prices of T-bills usually go up.
• Economic Conditions: How the economy is doing, like whether prices are going up (inflation), the economy is growing, or there are many people without jobs, can affect T-bill prices. Especially if people expect prices to go up a lot, they might want to buy T-bills to protect their money.
• Supply and Demand: If many people want to buy T-bills, but the supply is insufficient, the prices increase. But Prices may go down if only a few people want to invest in them or there are too many available.
• Government Actions: What the government does can also change T-bills; if the government decides to change how much interest they pay on T-bills, monetary or fiscal policy changes buying them.
• Market Sentiments: Sometimes, how people feel about the economy and the stock market can affect T-bill prices. If people worry about what’s happening in the world or there’s a big financial problem, they might want to buy T-bills, which can increase their prices.

Treasury Bills vs Bonds: Major Differences To Know

The differences between T-bills and Bonds are as follows:

Final Words

A balanced investment portfolio has a mix of equity-based and debt-based based instruments. It is also a mix of investment opportunities in the private sector and sovereign-guaranteed instruments. If you are in the process of building your portfolio, it is essential to start diversifying with a mix of these elements.

Investing in treasury bills is a promising way to diversify your portfolio and build more safety and security into it. Liquidity is a bonus that allows you to access funds within a year of investing. However, you will need to balance your wealth creation strategy by also investing in equity and debt instruments with a higher yield. This will set you on a path to creating wealth and achieving your financial goals, which can be pursuing higher education, travel, home purchase or planning for financial freedom.

FAQs about Treasury Bills