Treasury Bills (T-Bills) in India: Meaning, Types & Benefits

Treasury notes, or T-bills, are money market securities issued by the Indian government. Let us learn more about them:

Treasury bills allow investors to profit from their investments by redeeming them at face value.Assume you purchase a few treasury bills of ₹150 each at a discounted rate of ₹145. In the future, at maturity, you can sell it for ₹150 and earn ₹4 profit per unit.The RBI issues treasury bills as part of its open market activities. Also read: A Comprehensive Guide to 10 Short-Term Investment Plans

Investors can invest in T-Bills with the following maturities, and these are only known as the types of Treasury bills in India:

• Treasury Bills for 14 Days: Treasury Bills (T-Bills) with a maturity period of 14 days are short-term debt instruments issued by the government to raise funds. In the case of 14-day T-Bills, the maturity period is two weeks from the issuance date. Investors purchase T-Bills at a lower price and receive the full face value upon maturity, effectively earning interest on the difference.
• Treasury Bills for 91 Days: This type of T-Bill has a maturity term of 91 days or about three months. Investors who purchase a 91-day T-Bill will get the face value at the end of the 91 days and earn interest on the difference between the purchase price and the face value.
• Treasury Bill for 182 Days: The maturity term of the 182-day T-Bill, also known as the six-month T-Bill, is 182 days. Investors who choose this T-Bill commit their funds for a longer period, balancing short- and medium-term investment perspectives.
• Treasury Bill for 364 days: The 364-day Treasury Bill, popularly known as the one-year T-Bill, has the longest maturity time among the three varieties in India. Investors that choose this option commit their assets for a year, and they are sold at a discount with interest received upon maturity, much like regular T-Bills.

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A short-term treasury bill assists the government in raising funds to pay current obligations that exceed annual revenue generation.The Reserve Bank of India (RBI) also produces treasury bills as part of its open market operations (OMO) policy to control inflation and individual spending/borrowing habits. During periods of economic expansion that result in high and sustained inflation rates in the country, high-value treasury bills are given to the public, reducing aggregate money supply in an economy. It successfully dampens rising demand rates, which helps control inflation.Alternatively, the RBI implements a contractionary OMO regime during the recession and economic slowdown by reducing treasury bill circulation and the discounted value of the associated bonds. It disincentivises individuals from channelling their resources into this sector.A treasury bill is an essential monetary tool used by the RBI to regulate an economy's total money supply and for fundraising purposes.

• Minimum Investment: According to a mandate by the RBI, you need to make a minimum investment of ₹25,000 in Treasury Bills, with additional investments in multiples of ₹25,000. In the case of 14-day T-bills, the minimum investment is ₹1 lakh.
• Zero-Coupon Securities: Treasury Bills are zero-coupon securities. You gain profits when the face value is paid upon maturity, not on the discounted purchase price, allowing you to earn cumulative profit over the investment period.
• Trading: Every Wednesday, the RBI issues Treasury Bills and Bonds . As an investor, you can acquire them directly from the government, through participating banks, or authorised dealers. Trading is also possible based on bids, with a T+1 settlement process following T-bill redemption.
• Investment Yield Calculation: The yield percentage of a Treasury Bill is calculated using the formula:Yield Percentage = (100 - Discounted T-Bill Price) / Discounted T-Bill Price x 365 / T-bill tenure x 100.For example, for a 91-day T-bill with a discounted price of ₹99, the yield percentage would be 4.05%.
• Guaranteed Returns: Even when you buy Treasury bills at a discounted rate, you get guaranteed returns. How? Because these bills are always redeemed at face value.

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• Liquidity: Due to their short-term nature, Treasury bills offer excellent liquidity. You have a maximum maturity period of 364 days and the option to invest for as little as 14 days. This flexibility makes them suitable to meet short-term financial goals, and in case of an emergency, you can sell these bills in the secondary market.
• Risk-free: Since the RBI issues Treasury Bills on behalf of the government, they come with a guarantee, making them a risk-free investment. You will receive returns as per the initially stated rate at the time of purchase after the maturity period.
• Fixed Returns: The government and the RBI determine fixed rates for treasury bills. These rates will remain unchanged throughout the investment period. This stability is an attractive option if you seek fixed returns.
• Price Discovery: Price discovery involves determining the bill’s market value based on supply and demand dynamics, and factors like economic conditions, interest rates, and investor sentiment influence the market-set prices.

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• Low Returns: Despite being backed by the RBI and offering guaranteed returns, Treasury bills yield relatively modest returns. Compared to other investment options, the returns alone may not meet your financial goals.
• Taxation: Returns from treasury bills are subject to Short-Term Capital Gains (STCG) tax . They will be taxed at your applicable slab rate and can reduce the effective returns on your investment.
• Affected by Inflation: Your returns on treasury bills are susceptible to inflation. If the rate of return is lower than the inflation rate, the real value of the returns diminishes, reducing your purchasing power.
• Expensive: T-bills have a minimum investment requirement of ₹25,000 or ₹1 lakh. This may be difficult for small investors.

T-bill values fluctuate in the same way as other debt securities do. Factors, including macroeconomic conditions, monetary policy, and overall supply and demand for Treasuries, can influence pricing.

• Maturity Dates Maturity dates often determine T-bill prices. T-bills with longer maturities can provide larger yields when interest rates rise than those with shorter maturities. In other words, when interest rates are rising, short-term T-bills may be discounted less than longer-term T-bills, and when interest rates are falling, they may be discounted more.
• Market Risk Prices are affected by investors' risk tolerance. T-bill prices, for example, tend to fall when other assets, such as shares rise. On the other hand, during recessions, investors seek to invest in T-bills as a secure place for their money, increasing demand for these safe assets.
• The Federal Reserve System The Federal Reserve's monetary policy, as expressed in the federal fund's target rate range, significantly impactsT-bill pricing. The federal funds rate is the interest rate banks charge each other on overnight loansusing their reserve accounts.The Fed adjusts this rate to reduce or raise the amount of money in the economy, which impacts lending, inflation, buying power, and employment. A lower rate helps banks lend more money, whereas a higher rate reduces the money supply in the economy. When the Fed conducts expansive monetary easing by purchasing Treasuries, T-bill prices tend to climb. When the Fed trades its debt instruments, T-bill prices decrease.
• Inflation Treasuries relate to inflation, which measures the rate at which economic prices rise. Even though T-bills are the most liquid and safe debt security on the market, fewer investors buy them when inflation exceeds the T-bill yield.For example, if an investor purchased a T-bill with a 2% return while inflation was at 3%, the investor would have a net loss in real terms. As a result, during inflationary periods, T-bill prices tend to fall as investors sell them in favour of higher-yielding alternatives.

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The following persons may find the RBI-issued treasury bills to be an excellent investment:

• If you enjoy low-risk activities,
• If you want guaranteed returns,
• If you have short-term investment objectives and a surplus,
• If you're seeking an alternative to fixed deposits or liquid funds , look no further.

Treasury bills are debt securities with a one-year maturity date sold at a price below their face value and redeemed at face value upon maturity. Because the government's creditworthiness supports them, these bills have become a safe investment option and may suityour short-term goals. Yet tax returns are taxing and typically minimal. Also read: List of Tax-Free Income Sources in India