What are Treasury Bills or T-Bills?

The Reserve Bank of India had last month auctioned three Treasury Bills (T-Bills) at higher cut-off yields, dropping some hints on the hardening of short-term interest rates. The government raised ₹10,000 crore through this auction. But how does it work, let us see.

Treasury Bills are short-term borrowing tools for the government. They are promissory notes with guaranteed repayment at a later date. They have a maximum tenure of 364 days; issued in three maturities — 91-days, 182-days and 364-days.

Treasury Bills are issued at a discount to their original value and the buyer gets the original value upon maturity. Let us explain it through an example.

Say, the government will sell Rs 100 T-Bill at a discounted price of Rs 95 in the money market, but after the maturity of say 91 days, it will buy back the T-Bill at its original price of Rs 100.

So, the buyer who bought the T-bill for Rs 95, stands to make a profit of Rs 5 when the government buys back the T-Bill. T-Bills don’t generate any interest and are zero-coupon securities. They are a safe investment instrument as they are a liability to the government. They are backed by the highest authority in the country and have to be paid back even in times of a financial crisis.

But long term treasury bonds have often been criticised for their low returns. While slamming the low yield in his country, famous US investor and fund manager William Gross had last year termed it as an “investment garbage”. And he had also questioned if the stock markets will follow suit?

Short-term capital gains realised through T-Bills are subject to the STCG tax at rates applicable as per the income tax slab of the investor. However, retail investors aren’t required to pay TDS upon redemption of T-Bills. 

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