Treasury bills (T-bills) are short- term debt instruments with tenure of 91 days, 182 days and 364 days. These are issued by the Reserve Bank of India (RBI) on behalf of the government of India. These bills come with a sovereign guarantee from the government.
The RBI has made it easy for retail investors to invest in treasury bills and other government bonds. The RBI launched 'RBI Retail direct' platform in 2021 to allow retail investors to buy different government securities. An investor can open an account on the Retail Direct platform and start buying different government securities.
Unlike bank fixed deposits where the interest rate is known at the time of investment, the treasury bills do not pay any interest rate. However, the RBI announces the indicative yield before the weekly auction starts.
How is the return for treasury bills calculated?
"Treasury bills or T-bills are also called zero-coupon bonds because there is no explicit rate of interest mentioned for these bonds. Instead, the investors can buy T-bills at a discount to the face value. At the time of maturity, the investor receives the par (face) value of the T-bill, thereby earning the difference," says Anshul Gupta, Co-founder and Chief Investment Officer, Wint Wealth, a platform which facilitates bond transactions.
For instance, someone buys a 91-day T-bill with a face value of Rs 100 at the discounted price of Rs 98. At the time of maturity, the person earns Rs 2 as profit on a treasury bill with par(face) value of Rs 100. Rs 2 would be the yield/return earned by the individual on the treasury bill.
Gupta explains the calculation methodology of T-bills below:
Yield = (100-P)/P * [(365/D) *100],
P and D stands for the discounted price of the T-bill and the duration of T-bill in days, respectively.
To understand this better, if someone purchases a 91-day treasury bill with Rs 100 face value at the discounted price of Rs 98, the annualised yield will be:
P (Discounted price of treasury bill) = Rs 98,
D (Duration of treasury bill) =91 days
Yield = [(100-98)/98] *(365/91*100) = 8.18%
Do note that the face value of the treasury bill will always be Rs 100 irrespective of its duration. However, the discounted price will always be lower as the duration increases.
How is income from treasury bills taxed and shown in ITR
The treasury bills are listed on an exchange. Hence, an individual can either sell in the secondary market before maturity or hold it till maturity. Irrespective of the investment duration, the returns are taxed at the income tax slabs applicable to an individual.
However, tax experts have divided opinions about the head of income under which returns would be taxed.
The returns can be taxed either under - capital gains or income from other sources. Irrespective of the head, the tax rate remains the same.
"Both short-term capital gains and interest income are taxed as per the income tax slab rate applicable to the individual. Given the same, no tax advantage is available if the income from treasury bills is considered as capital gains or income from other sources," says Ankit Jain, partner, Ved Jain and Associates, a Delhi based chartered accountancy firm.
"Whatever be the head of income under which the individual classifies income from T-bills- capital gains/income from other sources, it will have no impact. Since the tax rate is the same, the assessing officer usually does not contest the heads of income classification claim. Thus, the submitted ITR will also not be classified as defective ITR just solely because of this reason," says Jain.
Also read: What are the slab rates for both new and old tax regime for FY 2023-24 (AY 2024-25).
Vijay Bharech, director, Deloitte Haskin & Sells LLP says, "In terms of taxation, while there isn't a specific tax section dedicated to T-bills. Typically, they are taxable as short-term capital gains since the holding period is less than 36 months. The taxation shall remain same for both the cases, whether T-bills are held till maturity or are sold in the secondary markets."
Rahul Charkha, Partner, Economic Laws Practice says, "The differential value received by the investors at the time of redemption of T-bills are taxable under the head 'Capital Gains' as short-term capital gains. In my view if the T-bills were sold in secondary markets, then the differential value between purchase and selling price would also be taxed as short-term capital gains."
How to invest in treasury bills via RBI Retail Direct
Treasury bills (T-bills) can be bought on the RBI's bond platform for retail investors called 'RBI Retail Direct. All an individual needs to do is open an account on this platform, complete their KYC, put in their bank details to start investing.
To start investing in T-bills an individual firstly needs to know when the T-bills auction happens. The auction happens weekly or fortnightly starting on Friday night and ending by Tuesday night. The minimum notified amount to invest in T-bills for retail individuals is Rs 10,000.
Once an individual has logged into the RBI retail direct portal, the bidding screen will open. Here an individual can bid for T-bills and other government bonds. If the bids given during the T-bills auction time by an individual are accepted by the RBI, the T-bills would be allotted. The RBI will send SMS and email intimations about the same too. To check for successful allotment of T-bills, an individual needs to see their investment holdings ledger.
