Treasury Bills

Treasury Bill is a money market instrument is issued by the Government of India. The bill is issued as a promissory note of repayment in the future. The purpose of a treasury note is to secure funds to meet the short-term fund requirements of the government. It is done to minimize the fiscal deficit of the country.

They are short-term investment instruments with three tenures of 91, 182 and 364 days. A treasury bill is issued at a discounted rate and is redeemed at nominal value, ultimately allowing some profit to the subscriber.

Treasury bills, also known as T-bills, allow the subscriber to earn a profit on investment by redeeming the treasury bills at face value. Let us explain it with treasury bills example:

Suppose you buy a few units of treasury bills worth INR 150 each at a discounted rate of INR 145. In the future, i.e., on maturity, you can redeem it at INR 150 to get INR 4 of profit per unit.

The treasury bills are issued by RBI under its open market operations. These bills are usually issued during a period of economic boom, at a time of high or continuous inflation, to control the aggregate money supply. Consequently, curbing the rapidly increasing prices that affect the poorer sections of the country.

As mentioned before, the returns of treasury bills are guaranteed. A T-bill yield calculates the return on your investment annually. In other words, if you have made a 5 INR profit over 91 days on an investment of Rs. 100, then as per this rate, how much would you make on a yearly basis?

Having said that, the formula to calculate the T-bill return is as follows,

Yield = [Discount Value]/ [Bond Price] * [365/number of days to maturity]

Calculating T-bill yield according to this formula,

Yield = [5/100] * [365/ 91]

= 20.05%

A subscriber would be required to pay short-term capital gain earned on treasury bills as per the income tax slab rate the subscriber belongs to. However, the retail investor is not required to pay TDS upon redemption.

Now that you know the basics of T-bills, let us focus on how to purchase them. Retail investors can buy Treasury bills or T-bills in India by setting up a "Retail Direct Scheme Account" with RBI. Treasury bills can also be bought through the stock exchange and primary and secondary markets.

Treasury bills are a great investment option for risk-conservative investors. However, they do have their own set of disadvantages:

The following factors influence T-bills prices and returns:

Here is an example of treasury bills that can help you understand how treasury bills work.

Let's say you plan to purchase a treasury bill with a tenure of 91 days. The T-bill has a face value of INR 150, but it is issued to you at a discount of INR 145. Upon the end of the treasury bill maturity period, you sell the T-bill at face value and earn a profit of INR 150 on each unit.