Treasury Bills Meaning

Treasury Bills Meaning

Treasury Bills, or T-bills, are short-term debt instruments issued by the government to meet its immediate financial needs. They are issued at a discount to face value, and upon maturity, the face value is paid to the holder. The difference between the purchase price and the face value is the interest the holder earns. These bills are considered highly secure as they are backed by the government’s credit.

Contents:

What Is a Treasury Bill?

A Treasury Bill (T-bill) is a short-term debt security issued by the government, typically with a maturity of less than one year. These are essentially a way for the government to raise funds to meet its short-term requirements. 

T-bills are sold at a discount to their face value and do not pay any interest. The investor receives the face value upon maturity, with the difference between the purchase price and the face value acting as the interest or the return on investment.

For example, if the government issues a T-bill with a face value of INR 1,000 at INR 900 with a maturity of 90 days, the investor will earn INR 100 over the period, the difference between the purchase price and the face value.

Types Of T Bills – Treasury Bills Maturity Period

In India, Treasury Bills are categorized based on their maturity periods. The different types of T-bills include:

  • 91-day T-bills
  • 182-day T-bills
  • 364-day T-bills

Each type serves a unique purpose and caters to different investor needs based on their risk appetite and investment horizon. The 91 days are the most common, auctioned every week on Fridays. 

On the other hand, the 182-day and 364-day T-bills are auctioned every alternative week, giving a variety to the investors. This variety in mutual periods aids investors in managing their short-term funds effectively, as they can choose a T-bill with a maturity period aligning with their financial needs. This way, they provide a convenient way to park their funds for short durations.

Features Of Treasury Bills

The main feature of Treasury bills is that they do not come with any risks because they are backed by the Indian government. 

Other features are as follows:

  • Zero Coupon Bonds: T-bills are issued at a discount and redeemed at face value, the difference being the investor’s return.
  • High Liquidity: They are highly liquid due to their short maturity period.
  • Absence of Collateral: No collateral is required for their purchase.
  • Available in Dematerialized Form: T-bills are available in dematerialized form, making transactions seamless and paperless.
  • Minimum Subscription Amount: The minimum subscription amount is INR 25,000 and in multiples thereof.

Advantages And Disadvantages Of Treasury Bills

The main advantage of treasury bills is that treasury bills are seen as one of the safest investment options as they are backed by the government’s credit. In contrast, the returns on treasury bills are generally lower than other investment options like stocks and bonds.

Benefits Of Treasury Bills

  • Liquidity: They are highly liquid and can be easily bought or sold in the secondary market.
  • Predictable Returns: The return on investment is almost assured with very low risk.
  • No TDS: No Tax Deducted at Source (TDS) on the interest earned.
  • Short-term Investment: Ideal for short-term investment with different maturity periods.
  • Easy to Understand: Their straightforward structure makes it easy for investors to understand.

Disadvantages Of Treasury Bills

  • Not Suitable for Long-term: Not an ideal choice for long-term wealth creation.
  • Affected by Inflation: Inflation can erode the purchasing power of the returns.
  • No Periodic Interest Payment: Unlike bonds, T-bills do not provide periodic interest payments.

Treasury Bill Taxation:

Treasury Bills are taxed under the head ‘Income from Other Sources’ and are taxed as per the individual’s income tax slab rate. For example, if Mr. A invests in T-bills and falls under the 30% tax slab, the interest earned from T-bills will be taxed at a rate of 30%. This taxation method applies regardless of the holding period.

Let’s say Mr. A invests INR 1,00,000 in a 91-day T-bill at a discount rate of 7%. The interest earned would be INR 1,750 (1,00,000 * 7%/365 * 91). If Mr. A is in the 30% tax bracket, the tax on the interest would be INR 525 (1,750*30%). Therefore, the net interest Mr. A receives is INR 1,225 (1,750-525).

How To Buy Treasury Bills In India?

      To buy Treasury Bills in India follow these steps:

  1. Open an Account with Alice Blue to invest in treasury bills for free.
  2. Log in to the RISE (Mutual Fund) application.
  3. After a successful login, click on “Government Bonds.”
  4. Select the desired “Security Name” for the T-Bill (91 Day, 182 Day, 364 Day).
  5. Click on “Place Order.”
  6. Specify the number of units you wish to purchase within the “Minimum To Maximum” range.

Important notes to consider when placing your T-Bill order:

  • Your orders will be executed after “Bid closing date” of each security. Ensure that you maintain a sufficient balance in your account on the “Bid Closing Date.”
  • Failing to maintain the required balance will result in the rejection of your order by Alice Blue.

Read more: How do I place an order for SGB (Sovereign Gold Bond) on the Alice Blue Mutual Fund Platform?

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Treasury Bills Meaning – Quick Summary

  • Treasury bills are short-term debt instruments issued by the government to meet its immediate financial needs.
  • They come in three different maturity periods: 91-day, 182-day, and 364-day T-bills, providing flexibility for investors.
  • T-bills are zero-coupon securities sold at a discount and redeemed at face value, the difference being the interest earned.
  • They are highly secure investments as they are backed by the government.
  • While they offer lower returns than other investment instruments, they are highly liquid and tax-efficient.
  • Investing in T-bills is straightforward through a Demat account, and bidding takes place on the RBI’s E-Kuber platform.

What Is a Treasury Bill? – FAQs  

1. What do you mean by Treasury bill?

A Treasury bill (T-bill) is a short-term debt instrument issued by the government to raise funds for a defined period, usually less than a year.

2. Are Treasury bills taxable in India?

The interest earned from T-bills is subject to federal taxation but exempt from state and local taxes.

3. Who issues Treasury bills?

In India, Treasury bills are issued by the Reserve Bank of India (RBI) on behalf of the government.

4. How do I buy a T bill?

  • Open an Account with Alice Blue to invest in treasury bills for free.
  • Log in to the RISE (Mutual Fund) application.
  • After a successful login, click on “Government Bonds.”
  • Select the desired “Security Name” for the T-Bill (91 Day, 182 Day, 364 Day).
  • Click on “Place Order.”
  • Specify the number of units you wish to purchase within the “Minimum To Maximum” range.

5. What is the Treasury bill interest rate?

ReferenceDateRateUnitsFrequency
Treasury Bills (over 31 days)25 Oct 20237.14 % p.a.,NSAWednesday Weekly

6. Is it safe to buy a T-bill?

The creditworthiness of the government is what makes T-bills so secure, so the answer is yes, they are a very safe investment option.

7. What is the biggest advantage of investing in T-bill?

The biggest advantage of investing in a T-bill is that it is risk-free. T-bills are backed by the government, and that’s why the risk is low as compared to other investments.

8. What is the difference between a bond and a Treasury bill?

The main difference between a bond and a Treasury bill is that bonds have a longer maturity period, often more than a year, while T-bills mature in less than a year.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

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