What is Treasury Bill (T-Bill)? – Meaning, Types, Features and Benefits
Treasury bills, otherwise known as T-bills, are money market instruments issued by the government of India. These bills are Reserve Bank of India-issued promissory notes with a repayment guarantee and are categorised as short-term debt instruments. Indian residents can invest in T-bills at a discounted price and get the higher face value of the bill at the end of the maturity to make profits.
Treasury bills and bonds are among the safest investment options you can choose for yourself as they are backed by government creditworthiness. The profit potential could be low, but since T-bills are government securities, they come with minimal risk too. Besides, these bills are extremely liquid with a maximum maturity of only 364 days.
Let’s dive in to know more about T-bills and their role in the Indian economy.
What is a Treasury Bill (T-bill)?
The government of India issues treasury bills to meet short-term financial requirements whenever there’s a fiscal deficit. T-bills act as a promissory note by the government with guaranteed repayment to the investors at a later specified date. This money market instrument is issued to investors at a nominal or discounted price. Point to note: there is a maturity period for each treasury bill, which could either be 14 days, 91 days, 182 days or 364 days. However, the minimum investment in a T-bill is ₹25,000, and in multiples of ₹25,000 thereafter.
After the maturity period is over, the government rolls out the bills by giving investors the face value of the bill. For example, suppose a treasury bill has a face value of ₹120, and available for purchase at a discounted price of ₹118.40. After the maturity period of, say, 91 days, is over, the government will purchase the t-bill at ₹120, making you a profit of ₹1.60. Note that the bills are available at discounted price at zero interest rate.
Why Does the Government Issue Treasury Bills?
The government of India issues treasury bills to raise short-term funds to finance its various expenditures (like infrastructure) and to manage its cash flow. By issuing treasury bills, the government can borrow money from the public without resorting to more expensive forms of borrowing, such as bank loans. Additionally, treasury bills help the government to control the money supply in the economy and maintain liquidity in the financial system.
The Reserve Bank of India issues treasury bills on behalf of the government under its open market operations (OMO) strategy for everyone to purchase. RBI does it to control inflation and regulate borrowing/spending habits of consumers. Whenever there’s high inflation rates in the country due to economic boom, the government issues high-value treasury bills to curb excessive money supply.
Similarly, during times of slowdown, the government rolls out T-bills at a reduced circulation rate and at discounted rates to divert investors’ resources to a desired sector, thereby boosting cash flows to the stock market.
Types of Treasury Bills
Treasury bills are determined by their maturity period. The maximum tenure of the treasury bills is below one year. Depending upon the maturity period, there are mainly four types of treasury bills as listed below:
| T-Bill Maturity Period | Auction Frequency | Minimum Investment |
| 14 days | Every Wednesday | ₹1 lakh |
| 91 days | Every week | ₹25,000 |
| 182 days | Every alternate week | ₹25,000 |
| 364 days | Every alternate week | ₹25,000 |
The tenure does not change for the Treasury Bills. The discounts and the Treasury Bills rates are subject to change over the years.
Features of Treasury Bills
1. Minimum Investment
Although The government issues the Treasury Bills at the nominal rate, there is still a requirement of the minimum investment you need to make in a treasury bill. The RBI instructs all investors to invest a minimum of ₹25,000. If you wish to invest more than a minimal amount, you can invest in multiples of ₹25,000 only. However, 14-day T-bills come with a minimum investment requirement of ₹1 lakh.
2. Zero-Coupon Securities
Investors earn capital gains from their investment in the government Treasury Bills. This is because after selling the bill, total face value is paid to the investor rather than the discounted price at which it was sold. As a result, investors stand to gain cumulative profit over their investment.
3. Trading
The RBI issues Treasury Bills and Bonds every Wednesday in the market. Investors can purchase directly from the government or through participating banks or authorised primary dealers. Depending upon the bids, you can also trade securities with Treasury Bills. After the redemption of the T-bill, a T+1 settlement process follows.
4. Investment Yield
To calculate the yield percentage of a treasury bill, we can use this simple formula:
- Yield Percentage = (100-Discounted T-Bill Price) / Discounted T-Bill Price x 365 / T-bill tenure x 100.
Now, let’s assume there’s a 91-day T-bill at a discounted price of ₹99.
So, the yield percentage of this T-bill would be:
(100-99)/99 x 365 / 91 x 100 = 4.05%
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Benefits of Treasury Bills
The benefits of the treasury bills are given below:
1. Liquidity
The government treasury bills have a maximum maturity period of 364 days. However, you can invest in bills for as low as 14 days, making them a potentially good fit for your short-term goals. If you have purchased bills with a longer tenure, you can sell those government securities in the secondary market in case of a financial emergency and get returns.
2. Risk-free
The RBI issues T-bills on behalf of the government. Therefore, your investment comes with a complete guarantee from the government. After the maturity period is over, you get returns as per stated on your treasury bills at the time of the purchase.
3. Fixed Returns
The government of India and the RBI determines the fixed treasury bills rate. Even before the market opens, the rate is set and doesn’t change. The sales of the treasury bills also do not impact its price. If you are an amateur investor, treasury bills could be one of safest money market instruments you can choose.
4. Price Discovery
Price discovery in treasury bills refers to the process of determining the market value of these short-term government securities through supply and demand. The market sets the price of treasury bills based on various factors, including economic conditions, interest rates, and investor sentiment. Price discovery helps investors clearly assess the risks and returns associated with treasury bills and make informed investment decisions.
Treasury Bills Limitations
1. Low Returns
The government treasury bills, although safest, do not generate significant returns on the investment when you compare them with the other securities in the market. The returns that are generated over the treasury bills are also predetermined, so you do not get more returns if the market performs well. At times, these returns could be inadequate to beat inflation too.
2. Taxable Returns
The returns made on T-bill investments are subject to short term capital gains tax (STCG), and are taxed as per the investor’s tax slab rate. As such, the tax rate could go as high as 30% depending on the applicable slab rate, and could further diminish the returns.
3. Expensive
T-bills come with a minimum investment requirement of ₹25,000 or ₹1 lakh which might not be affordable or feasible for many investors.
Who Should Consider Investing in Treasury Bills?
The RBI-issued treasury bills could be a perfect investment for the following individuals:
- If you have a low-risk appetite
- If you’re looking for assured returns
- If you have short-term investment goals and a surplus amount
- If you’re looking for an alternative to fixed deposits or liquid funds
Tax on Treasury Bills
Treasury bill returns are subject to STCG tax, and are taxed as per the investor’s tax slab rate. As such, these could attract up to 30% tax as per your tax slab rate. However, you’re not required to pay any TDS upon redemption of these T-bills.
Final Word
Treasury bills are debt instruments with a maturity period of only up to one year, which are sold at a discount to their face value, and redeemed at their face value upon maturity. These bills are considered a safe investment option as they are backed by the government’s creditworthiness, and could be a good fit for your short term goals. However, the returns are taxable and usually on the lower side.
That said, if you’re looking for higher returns and an affordable investment option, you may consider investing in a range of low-cost mutual funds from Navi Mutual Fund. Investments start at ₹10, depending on your chosen fund.
Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.
FAQs
No, after the maturity period, you must give it back to the government to get the investment returns. Owning it for a longer period or more than the maturity period will not change its return value.
Only the central government has the power to issue the treasury bills. State governments do not control or regulate treasury bills. The Reserve Bank of India brings the Treasury Bills to the market on behalf of the central government.
After you purchase treasury bills, you get the treasury bill certificate from the issuing authority. On this certificate, all the things will be mentioned, like your name, the amount invested, the date of maturity, and the amount you will get after the maturity period.
The face value could change during the tenure of the Treasury Bills. However, this change in no way will impact your returns. The amount you have invested and will get as a return is clearly mentioned on your bill; you will get returns accordingly. So, the face value may change for later investors, but it will remain constant for you after the purchase.
After the bill is matured, you can get it redeemed. Usually, the return amount is paid in cash to the investors. However, you can also get it redeemed by other means.
