Treasury bills are money market instruments. They are mortgages against which the government borrows money for a short term. Investors get these Treasury bills at discounted prices and redeem them at a higher original amount value at maturity. These bills, also called T bills, are like a promise from the government to repay the money you have lent them.
T-bills are straightforward investments with a fixed term, usually 14 days to 364 days. Here, we will explore treasury bills, their features, types, yield calculations, benefits, limitations, and much more.
Treasury Bills Meaning
Treasury bills are short-term financial instruments issued by RBI on the Government of India’s behalf (GOI) in the form of a promissory note. The primary objective of a treasury bill is to meet the short-term financial requirements of the central government. For investors, they present one of the safest investments with the highest liquidity among government securities.
Treasury bills come with four different types of tenures 14, 91, 182 and 364 days. Investors can make some profit from a T-bill as it is issued at a discounted price and redeemed at a higher orignal value.
Features of Treasury Bills
Here are some of the features of treasury bills listed below:
- Zero-Coupon Debt Instruments:
Treasury bills do not provide any interest income for investors. However, they can earn capital appreciation instead of interest payments. This is earned by purchasing at a discounted price from its face value and getting the full face value back on maturity.
- Short Tenure:
T bills are short-term debt instruments with tenures ranging from 14 days to 364 days. It allows investors quick access to the funds providing a higher liquidity. It can be a perfect investment option for investors seeking flexible and secure investment options with shorter tenure.
- Low-risk Instrument:
T-bills are mainly popular among investors as it is considered a risk-free investment safer than even fixed deposits. They carry a sovereign guarantee and provide better returns than FDs with the same tenure offered by PSU Banks. This makes T-bills an appropriate choice for conservative investors.
Types of Treasury Bills
Majorly there are four types of treasury bills depending on the tenure, which are as follows:
- 14-day Treasury bill
- 91-day Treasury bill
- 182-day Treasury bill
- 364-day Treasury bill
For each type the tenure of a treasury bill remains fixed, however, the face value of bonds keeps fluctuating on a periodic basis. The face value fluctuates based on certain factors like total bids placed, RBI's monetary policy and the funding requirements.
Who Issues Treasury Bills
In India, treasury bills were first issued by the Reserve Bank of India (RBI) in 1917. These T-bills are issued through an auction conducted by the central bank at regular intervals. The auctions are held at RBI’s electronic platform called E-Kuber, where banks, institutional investors and primary dealers put their bids.
Apart from banks, trusts and institutions, individuals can also purchase treasury bills directly from RBI. Banks usually offer T-bills to the Reserve Bank to obtain funds under a repo rate. Likewise, they can also maintain the same to fulfil their SLR (Statutory Liquidity Ratio) requirements.
Treasury Bills Minimum Amount
The minimum amount of investment in a T-bill is Rs. 10,000 and investment higher than that must be in multiples of Rs. 10,000. After the bill reaches its maturity, you will get the maturity value credited to your account automatically.
Treasury Bills Duration
The Government of India (GOI) offers Treasury bills primarily to meet the short-term financial requirements of the government’s treasury. Hence, these bills are issued at various tenures. At present, treasury bills come with four different types of tenure which are 14 days, 91 days, 182 days and 364 days treasury bills.
A 14-day T-bill has the shortest tenure of 14 days while a 364-day t-bill has the highest tenure.
Treasury Bills Example
Let's understand the concept of T-bills with the help of an example. For instance, an 182-day t-bill with a face value of Rs. 150 is available for purchase at a discounted price of Rs. 115. After 182 days the government will purchase the bill at its face value which was Rs. 150, making you a gain of Rs. 35.
However, please note that T-bills are zero coupon instruments and it does not allow investors to earn interest income from the same.
T-Bills Yield Calculation
The yields ontreasury bills are quite assured and it is calculated on an annual basis. In simple terms, if you make Rs. 35 on a Rs. 115 investment, the annual yield would be calculated using the following formula.
Yield = [Discount Value]/[Bond Price] * [365/number of days to maturity]
= [35/115] * [365/182]
= 0.3043 *2
= 0.6086
=60.86% or 61%
How to Buy Treasury Bills in India
There are several ways to purchase a treasury bill in India either through RBI’s retail direct scheme account or through a stock exchange primary or secondary.
- Through Stock Exchange: You can also purchase T billsfrom a stock exchange i.e. either from the primary market or from the secondary market. To carry out the purchase transaction, you will require a demat account which you can open through your broker or bank. Once your account is active, you can start your transaction.
- Through RBI: You can also make the purchase directly through RBI; for this, you will have to open an RDG (Retail Direct Gift) account with the Reserve Bank of India. You can also link this account with your savings account to carry out the purchase transaction. You will have to make the purchase transaction through an auction conducted by the central bank at regular intervals.
Tax on Treasury Bills in India
In India, the return received from treasury bills is subject to tax and it falls under STCG (Short Term Capital Gains) as per the applicable tax slab rates of the investor.
There is another additional benefit which comes with T bills- there is no TDS deducted from the income at the time of redemption of these G-secs. As a result, it removes the hassle of claiming it back if the particular investor does not fall under the taxable income bracket.
Difference between Treasury Bills and Bonds
Here are some of the differences between a treasury bill and a bond.
| Point of Difference | Treasury Bills | Bonds |
| Tenure | These are short-term financial instruments i.e. less than a year (364 days T-bill). | These are long-term debt instruments. The tenure of bonds can range anywhere between 1 year to 20 years. |
| Annual Yield | The annual yield of T-bill is lower compared to other g-secs. | Coupon rates are comparatively higher than treasury bills. |
| Income Frequency | There is no regular income, you can redeem at the time of maturity and sell in the secondary market. | The coupon (interest) payments are made at regular intervals |
| Price Fluctuation | The price fluctuations are fewer because of its short tenure. | Prices of a bond tend to fluctuate more due to a longer tenure. |
| Issue Price | T-bills are issued at a discounted price on their face value. | Bonds are not issued at a discounted price as there are regular coupon payments throughout the tenure. |
Treasury Bills Advantages and Disadvantages
Advantages:
Here are some of the benefits of investing in a treasury bill:
- Risk-free Investment Option:
Treasury bills are considered risk-free investment options as they are issued by the RBI on behalf of the central government. Due to the sovereign guarantee, the risk associated with a treasury bill is considered negligible compared to other debt instruments.
- Liquidity:
It also provides high liquidity due to its shorter tenure. As T-bills are purchased by companies, large investors and banks, investors can sell them in the secondary market. Moreover, you can secure a loan against T bills in an emergency. All of these options allow quick redemption before maturity.
- Price Discovery:
The issue price of T bills is determined by the process of price discovery. In simple words, it means that the market values of these securities are determined by their demand and supply. There are also several other factors which can affect the price which are like investor sentiment, economic condition etc.
Disadvantages:
Listed below are some of the limitations of t-bills:
- Higher Entry Barrier:
To invest in T bills, the minimum amount of investment required is Rs. 10,000 and in multiples of Rs. 10,000 thereafter. This high entry barrier makes it expensive and poses affordability challenges for many potential investors.
- Lower Returns:
The returns generated from these types of G-secs are lower as compared to other debt instruments. Also, the returns are predetermined hence you will not benefit even if the market performs well. Even there are times when the returns generated fail to beat the inflation.
- Returns are Taxable:
The returns generated from such types of G-secs are taxable and treated as STCG (Short Term Capital Gains) as per the investor's slab rates. In such a scenario, the tax rate can go as high as 30% depending on the investor's income.
Conclusion
To wrap up, treasury bills allow you to park your money for a short duration without taking a big risk. By purchasing T-bills, you can enjoy the benefits of liquidity, safety, and predetermined and secured returns. Whether you're looking to preserve capital, diversify your portfolio with a low-risk instrument, or earn a steady return, T-bills offer a valuable option worth considering.
