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Treasury Bills – Rates, features and benefits

There are times when the government requires funds to meet some of its short-term financial obligations. In such a scenario the central government approaches the general public to raise funds. Therefore RBI issues securities which are backed by the government of India, one such debt instrument is Treasury Bill. It is a promissory note on behalf of the government offering guaranteed return on investments.

Here in this article, we will be discussing more about Treasury bills, their types, t bill rates, features, benefits and more.

What is a Treasury Bill?

Treasury bills also known as T-bills are one of the popular money market instruments. These are short-term investment options issued by the GOI (Government of India). It is basically a promissory note with guaranteed payment after a stipulated tenure.

These are one of the best short-term investment options offering a great means to mitigate market risk associated with one’s portfolio. Mainly there are two types of treasury bills: T-bills offered by GOI (government of India) and commercial bills offered by other financial institutions.

It is one of the safest investment options and comes with almost no risk as it is backed by the GOI (Government of India). The Indian government issues these types of securities to raise funds from the common public in order to meet short-term fund requirements and to reduce the country’s fiscal deficit.

Types of Treasury Bills

Currently, there are four types of T-bills available for the general public to invest in. Treasury bills are categorized based on their maturity tenure. The four t-bill options are 14 days treasury bills, 91 days treasury bills, 182 days treasury bills and 364 days treasury bills.

Here are the types of T-bills categorized in terms of tenure along with the minimum investment required.

TypesMaturityAuction FrequencyMinimum Investment brief
14 days T-bills14 daysEvery Wednesday₹1,00,000
91 days T-bills91 daysEvery Wednesday₹25,000
182 days T-bills182 daysEvery alternate Wednesday₹25,000
364 days T-bills364 daysEvery alternate Wednesday₹25,000

Why Does the Government Issue Treasury Bills?

The government of India primarily raises these short-term funds to meet its brief project requirements such as development of hospitals, highways, bridges etc. These tactics are implemented to generate a substantial amount of revenue to ultimately reduce the fiscal deficit of the country’s economy. The Reserve Bank of India is the issuing authority and they use this to regulate the market liquidity during a particular period of time.

Treasury Bill Rates

The Reserve Bank of India auctions treasury bill on a weekly basis using NCB (non-competitive bidding) and its price is based on several factors which are as follows:

  1. Treasury bill demand and supply dynamics
  2. Inflation
  3. Macro-economic circumstances
  4. Monetary policy

The Treasury bill yield data for the last few decades based on the latest data available are given as follows:

T- Bill typesYield in %(t bills interest rate based on latest data available)FREQUENCYRANGE
91 Days T- bills6.19%monthlyJan 1993 to April 2018
182 Days T- bills7.078 %monthlyApril 2005 to Sep 2023
364 Days T-bills6.63%monthlyApril 1992 to April 2018

Features of Treasury Bills

Here are some of the key features of treasury bills:

  1. The minimum amount of investment required is ₹25,000 and in multiple of ₹25,000. The minimum amount for a 14-day T-bill is ₹1 lakh and in multiple of lakhs.
  2. Treasury bills are offered at a discounted rate while redeemed at par during maturity.
  3. These are completely zero-risk instruments and do not have default risk, as they are backed by the GOI (Government of India).
  4. T-bills are available in both physical and dematerialised formats. In physical form it is issued as a promissory note and in electronic form it is issued by crediting the same in a Subsidiary General Ledger Account (SGL account).

Benefits of Treasury Bills

Treasury bills are one of the popular investment choices among the common public. It comes with multiple advantages which are as follows:

  1. Zero Risk: One of the significant benefits of investing in T-bills is that it is completely risk-free, as these securities are backed by the GOI (Government of India) therefore they do not have the risk of default, and offer  guaranteed return.
  2. High Liquidity: Moreover T-bills are highly liquid as it has a highest tenure of 364 days and the minimum tenure goes as low as 14 days.
  3. Flexibility: Investors are allowed to place their NCBs (non-competitive bids) which are organised by the reserve bank every week or every alternate week (for some T-bills).

Limitations of Treasury Bills

Here are some of the limitations of treasury bills:

  1. Less Returns:  The ROI from a treasury bill is comparatively less than any other securities available in the market. As it is not linked with the market, therefore you will receive a predetermined return even if the market outperforms.
  2. High Rates of Tax: These treasury bills are short-term investment options hence are subject to short-term capital gains. Therefore it is taxed as per the applicable slab rates. The tax rate can go as high as 30% depending on the annual income of the investor.
  3. High Entry Barrier: Treasury bills come with a high entry barrier as the minimum amount required is ₹25,000 and the 14-day T-bill comes with a minimum investment of ₹1 lakhs. Due to its high entry barrier, it becomes difficult for many investors to make an entry.

Taxation on Treasury Bills

As the maximum tenure available in a treasury bill is 364 days which is less than a year, as a result, these are considered as short-term investment options. Therefore, T-bills are subject to STCG (short-term capital gains) which is taxed as per the applicable slab rate of the individual. And the tax rate can go as high as 30% plus surcharge and cess depending on the applicable slab rate.

Who Should Consider Investing in Treasury Bills?

Treasury bills can be fantastic investment options for those who are looking forward to investing in secure investment options along with stable returns. The NCB (non-competitive bidding) process also allows additional flexibility for the investors to participate in the bidding process and place their bids. 

Moreover, it is ideal for any individual irrespective of their risk tolerance or knowledge. It can also be an appropriate investment option for the investors who are looking forward to diversify their portfolio and mitigating the magnitude of market risk from their portfolio.

Conclusion

To summarize, treasury bills are one of the best risk-free debt securities available in the market available for the short term. If you are looking forward to invest in a risk-free debt security then a T-bill can be the best option out there.  As it is backed by the central government, it has almost negligible risk of default.

However, there are certain limitations as stated above, if you are comfortable with those you can start investing in treasury bills.

FAQs

Is it possible to hold a T-bill after the date of maturity?

No, one cannot hold a treasury bill investment even after the date of maturity. As it is a government security therefore you must return it back and claim your return on investment.

Can both the state and central government issue a T-bill?

No, state governments do not have the power and authority to issue a treasury bill, only the central government can issue and regulate the same.

Can I withdraw my T-bill investments prematurely?

A treasury bill investment cannot be withdrawn prematurely. However the investor can re-sell it in the secondary market to redeem the value of his investment.

What is the difference between a fixed deposit and a treasury bill?

Like FDs, treasury bills offer fixed and guaranteed returns on investments. However, fixed deposit returns can vary depending on the bank but the ROI from a T-bill  remains the same at a particular period on time.  Also it is comparatively lower than a regular fixed deposit scheme.

Does the face value of a T-bill remain constant?

The face value of t-bill changes from time to time. But once you have completed your purchase it will remain constant for you and you will receive a guaranteed return on your investment while the change will be applicable for later investors.

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