What are treasury bills and how do they work?

Treasury bills, or T-bills, are short-term debt securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They help the government meet its immediate financial requirements. Essentially, they serve as a government commitment to repay a specified amount on a future date. T-bills are issued at a discount to their face value, and the difference between the purchase price and the face value represents the potential return for investors. This articled helps investors understand the workings of T-bills and how they can diversify their investments with options that carry relatively lower risk.

Table of contents

• What are treasury bills?
• How do treasury bills work in India
• Why the government issues treasury bills
• Types of treasury bills
• How do T-Bills generate gains?
• Features and benefits of treasury bills
• Limitations of treasury bills
• Yield rate on treasury bills
• Taxation on treasury bills in India
• Who should consider investing in treasury bills?
• How to invest in treasury bills in India

What are treasury bills?

Treasury Bills, often called T-Bills, are short-term debt securities issued by the Government of India to raise funds. These securities are short-term instruments, with maturities of up to a year. They are also known as “zero coupon bonds” as they pay no rate of interest.

This article gives you a comprehensive guide on treasury bills.

How do treasury bills work in India

Treasury bills in India are issued by the Reserve Bank of India (RBI) on behalf of the Government of India through periodic auctions. They are short-term debt instruments issued at a discount to their face value and redeemed at par on maturity.

Investors can purchase treasury bills directly through primary auctions conducted by the RBI, subject to eligibility and access. They may also gain exposure through the secondary market, or indirectly through debt mutual funds that invest in treasury bills.

Treasury bills are issued with maturities of 91 days, 182 days, and 364 days. They do not pay periodic interest; instead, the difference between the issue price and the face value represents the return. Treasury bills may be held until maturity or traded in the secondary market, subject to market liquidity.

Why the government issues treasury bills

The government issues treasury bills to raise short-term funds to finance various expenditures, such as budget deficits and government projects. T-Bills can help governments manage their cash flow needs efficiently. By issuing treasury bills, governments can also control the supply of money in the economy and influence interest rates.

Types of treasury bills

Treasury bills are commonly classified based on their maturity periods and include

• 91-day treasury bill
• 182-day treasury bill
• 364-day treasury bill

How do T-Bills generate gains?

T-Bills do not offer a rate of interest but are issued by the government at a discount on the face value. For example, a treasury bill with a face value of Rs. 100 may be issued at Rs. 97 (a discount of Rs. 3). However, the investors can sell the bill at its face value (Rs. 100) on maturity and realise a gain of Rs. 3.

Also Read: What are the opportunities and risks of investing in emerging markets?

Features and benefits of treasury bills

Here are some key aspects of treasury bills for investors to consider:

• Government-backed instrument: Treasury bills are issued by the Government of India, which lowers credit risk compared to many other market instruments.
• Short maturity period: T-Bills have maturities of up to one year, making them suitable for short-term financial planning.
• Issued at a discount: They are sold below face value and redeemed at par on maturity, with the difference representing the investor’s gain.
• High liquidity: Treasury bills can be traded in the secondary market, allowing investors to access funds before maturity, subject to market conditions.
• No interest payments: T-Bills do not pay periodic interest; returns are realised only at maturity.
• Suitable for portfolio stability: They may help add relative stability and diversification to a portfolio, especially during periods of market volatility.

Limitations of treasury bills

• Lower return potential: Treasury bills typically offer lower returns compared to equity or longer-duration debt instruments.
• Inflation risk: If inflation exceeds the yield on T-Bills, the real value of returns may decline.
• Interest rate sensitivity: Market interest rate movements can impact yields, particularly if T-Bills are sold before maturity.
• Short-term nature: Due to their limited tenure, treasury bills may not align with long-term financial goals.

Yield rate on treasury bills

T-bills do not pay periodic interest; instead, the yield arises from the difference between the purchase price and the face value received at maturity.

T-bill yields are market-determined and are set through RBI auctions, where investors bid based on prevailing interest rates, liquidity conditions, and demand for short-term government securities. As a result, yields can vary across different maturities—such as 91-day, 182-day, and 364-day T-bills—and may change from one auction to another.

In general, T-bill yields tend to move in line with short-term interest rates and broader monetary policy conditions.

Taxation on treasury bills in India

Gains from treasury bills are added to the investor’s total taxable income and taxed according to their applicable slab rate. Indexation benefits do not apply.

Who should consider investing in treasury bills?

Treasury bills can be suitable for individuals and institutions looking to deploy surplus funds for a short period with relatively lower risk. They may be suitable for those who prioritize relative stability of capital over the potential for higher returns. Individuals needing short-term investment options—whether for an upcoming expense or to hold funds temporarily before investing elsewhere—may also find T-bills suitable.

Moreover, banks, financial institutions, and corporate treasuries frequently use T-bills to manage short-term liquidity. They may also be suitable for investors looking to diversify with assets that have a relatively low correlation to equity markets. However, while they carry relatively lower risk, they are not entirely without risk, and their returns are typically lower than those of equity or longer-term debt instruments.

How to invest in treasury bills in India

Retail investors in India have more than one way to invest in treasury bills. The steps below outline the commonly used routes and key actions involved in the process.

• RBI Retail Direct route: Register on the RBI Retail Direct platform if you prefer to purchase treasury bills directly. This platform allows non-institutional investors to participate in primary auctions without brokerage charges.
• Stock exchanges route: Begin by opening a demat account and a trading account with a SEBI-registered intermediary. In this route, treasury bills are credited in dematerialised form.
• Review auction schedules published by the RBI. Treasury bills are typically auctioned weekly, usually on Wednesdays, though the schedule may vary.
• Submit a non-competitive bid if you prefer allocation at the weighted average yield decided in the auction. This approach may be suitable for retail investors who do not wish to quote specific yields.
• Complete the payment through your linked bank account. On allotment, the treasury bills will appear in your Retail Direct Gilt (RDG) account or demat account.
• Hold the treasury bills until maturity or sell them in the secondary market if liquidity is available.
• Invest through mutual funds: Many debt mutual funds invest in treasury bills. This may be a convenient ways to invest indirectly in these securities through a professionally managed and diversified route.

Also Read: Flexi cap funds: Exploring growth potential in emerging markets

Conclusion:

Considered to be relatively stable and reliable, T-Bills can be a suitable avenue for short-term investments or can be added to a portfolio for stability and diversity.

FAQs

What are treasury bills (T-Bills)?

Treasury Bills (T-Bills) are short-term debt instruments issued by the Reserve Bank of India (RBI) on behalf of the Indian government. They serve as a commitment from the government to repay a specified amount on a future date and are considered relatively low-risk investments.

How do Treasury Bills work?

T-Bills are issued at a discount to their face value and redeemed at full value upon maturity. Investors do not receive periodic interest payments; instead, their potential return is derived from the difference between the purchase price and the face value.

What are the different types of Treasury Bills in India?

The Indian government typically issues Treasury Bills with three different maturities:

• 91-day T-Bills
• 182-day T-Bills
• 364-day T-Bills

What is the minimum investment required for treasury bills?

The minimum investment amount for T-Bills varies based on RBI guidelines.

How do investors earn returns from treasury bills?

Investors earn returns from treasury bills through the price difference between the purchase cost (discounted price) and the redemption amount (face value). Since T-Bills are issued at a discount and redeemed at full value upon maturity, the discount represents the investor’s potential earnings.

Are treasury bills in India risk-free?

Treasury bills in India are considered relatively low-risk as they are backed by the Indian government. However, they are not entirely risk-free. While the risk of government default is minimal, investors may face interest rate risk if they sell before maturity, as market fluctuations can impact returns.

What is the maturity period of a treasury bill in India?

Indian Treasury Bills are issued with short-term maturity periods, typically 91 days, 182 days, or 364 days. These shorter durations make them a suitable choice for investors seeking short-term investment options.

Are treasury bills better than other available savings options?

They are not inherently ‘better’. The suitability of Treasury Bills depends on an investor’s financial goals and risk tolerance. T-Bills provide entail low risk and provide high liquidity, making them suitable for parking short-term funds. However, they do not offer capital preservation or guaranteed interest like fixed deposits or savings accounts. So, investors should evaluate where to invest based on their needs.

Is T-bill better than FD?

Treasury bills are not inherently more suitable than fixed deposits. Their suitability depends on factors such as investment horizon, liquidity needs, and return expectations.

Can a normal person buy treasury bills?

Yes, retail investors may buy treasury bills in India through authorised platforms such as RBI Retail Direct or through the secondary market.

How does inflation affect treasury bills?

If inflation rises above the yield on treasury bills, the real value of returns may decline. Inflation can therefore affect purchasing power, even if nominal returns remain unchanged.

What is the maturity period of T-bill?

Treasury bills in India are short-term instruments with maturity periods of 91 days, 182 days and 364 days.