What are Treasury Bills and how they work?

The government of India issued T-Bills to meet its short-term liquidity requirement. These are considered safe investments as they enjoy a sovereign guarantee.  Thus, retail investors seeking short-term and low-risk options are increasingly considering investing in Treasury Bills. Understanding what T-Bills are will help you make the right investment decisions that positively impact your finances.

What are T-bills?

T-Bills are Treasury Bills, short-term debt instruments issued by the Government of India through the Reserve Bank of India. Instead of earning periodic interest on T-bills, you earn the return at maturity. For example, a 91-day T-bill with a face value of ₹100 may be issued at ₹98.50. You earn ₹1.50 on maturity. Let’s understand the components involved:

Why are they popular?

With fixed deposit rates remaining stable and stock markets displaying instability, many Indian investors have turned to T-bills for capital preservation. The following features of Treasury Bills make them attractive to many investors:

• Short Maturity: You can choose from 91, 182, or 364-day options, ideal for investors seeking low-risk parking of funds and quick returns.
• Zero Default Risk: There is no default risk as the T-bill is backed by the government of India, which assures you that you are a conservative investor.
• No TDS Deducted: Unlike FDs, taxes are not deducted from the T-bill source, enhancing your post-tax returns.
• Tradable on Stock Exchanges: With T-bills, you can sell them before maturity, making it ideal for investors who need to access their funds early.
• High Liquidity: You can easily trade T-bills on various online platforms, making it a convenient way for retail investors to manage their finances.

How Do Treasury Bills work?

Below is a step-by-step process of how Treasury Bills work:

1. Issued by RBI Through Auctions: The process begins when the RBI issues T-bills via auctions every week.
2. Purchased at a Discount: Investors buy T-Bills for less than their face value. For example, instead of paying ₹100, you may pay ₹98 or ₹94.
3. No Interest: T-Bills do not offer regular interest. Instead, your return is the difference between the amount you paid and the amount you receive at maturity.
4. Full Value Paid on Maturity: On the maturity date (91, 182, or 364 days later), you receive the full face value, usually ₹100.

For Example:

Who should invest?

• The investors who have a low-risk tolerance. Ideally, for those who prefer using fixed-income tools with minimal risk of defaulting.
• Those looking for short-term parking of idle funds, as they offer access to liquidity with periods as short as 91 days
• Those who want portfolio diversification without market exposure, as they are not linked to equity markets, hence reducing risks.
• Corporate treasuries and institutions use T-bills to manage short-term cash flows, which have assured returns.

The pros and cons of investing

The gains acquired from T-bills are considered short-term capital gains. They are taxed as per the investor's income tax slab. Additionally, no TDS is deducted at the source, which explains the treasury bills in the world's recent financial landscape. 

Wrapping up

T-bills are a simple and powerful tool that you can use to preserve capital, especially in volatile markets. If you are a new investor or managing a large portfolio, investing in Treasury Bills will help balance safety and liquidity. The barriers to entry are now at an all-time low, thanks to zero brokerage and easy-to-use online platforms.

If you want to explain Treasury Bills to a beginner or decide if they fit your financial goals, consider them simple, government-backed securities designed to protect your capital over short periods.