What are Treasury Bills: Meaning, Benefits & How to Buy?

Treasury bills (T-bills) are short-term, government-issued money market instruments used to raise funds, offering investors a low-risk investment option. Purchased at a discount and redeemed at full face value at maturity, they provide predictable returns over terms typically ranging from 14 to 364 days. Backed by the government’s credit, T-bills are highly secure and liquid, making them ideal for short-term financial planning. 

This article covers their features, types, yield calculations, benefits, and limitations.

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.

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. 

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.

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 on treasury 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 bills from 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.

Who Can Invest In Treasury Bills

Treasury Bills (T-Bills) are short-term government securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are available to a wide range of investors. Here's who can invest in T-Bills in India:

Individuals: 

Any individual, including retail investors, can purchase T-Bills. They can participate through the RBI’s Retail Direct Scheme Account (RDG) or via banks, brokers, or stock exchanges. Non-Resident Indians (NRIs) can also invest through their NRE or NRO accounts.

Institutions: 

Entities such as commercial banks, primary dealers, mutual funds, corporations, trusts, provident funds, pension funds, insurance companies, and other financial institutions are eligible to invest in T-Bills. These entities often participate in competitive bidding during RBI auctions.

Firms and Corporate Bodies: 

Businesses and corporate entities registered in India can invest in T-Bills, either through auctions or the secondary market.

State Governments: 

State governments can invest in T-Bills as part of their financial management strategies.

Eligible Provident Funds: 

Certain provident funds, as specified by the RBI, are allowed to invest in T-Bills.

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.

Advantages of Treasury Bills

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.

Key Details To Remember

• T-Bills are issued in tenures of 14, 91, 182, and 364 days, with a minimum investment of ₹10,000 (in multiples thereof) for non-competitive bidding. Some sources mention a minimum of ₹25,000 for certain auctions.
• Investors can participate in RBI auctions (competitive or non-competitive bidding), buy through stock exchanges (NSE/BSE), or invest via mutual funds that include T-Bills in their portfolios.
• T-Bills are considered low-risk, as they are backed by the Government of India, and offer high liquidity due to their short-term nature and tradability in the secondary market.

Anyone registered in India, including individuals and institutions, can invest, making T-Bills accessible to both retail and large-scale investors seeking secure, short-term investments.

Disadvantages of Treasury Bills

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.