Treasury Bill

The Government of India borrows for long periods and for short ones. A Treasury Bill, or T-Bill, is how it borrows short.

A T-Bill pays no interest at all. There is no coupon and no half-yearly cheque.

Instead it is sold for less than its face value. On maturity the Government pays the full face value. The difference between the two is the investor's entire return.

There are three tenors and only three: 91 days, 182 days and 364 days. The maturity of a T-Bill does not exceed 1 year.

That one-year line is how the workbook sorts the whole family. A government security with a maturity of less than a year is called a treasury bill or a cash management bill. One with a maturity of a year or more is a government bond, or dated security.

One more split matters. The Central Government issues both treasury bills and dated securities. State Governments issue only bonds.

Where it sits. Section 10.2.2 defines a G-Sec as a tradable instrument issued by the Central or a State Government, acknowledging the Government's debt obligation. Securities issued for a maturity of less than 1 year are usually called treasury bills or cash management bills; those of 1 year or more are government bonds or dated securities. G-Secs range from less than 91 days to as long as 40 years.

The instrument itself. Treasury Bills are short-term debt instruments issued at a discounted price by the Government of India, in 3 tenors — 91, 182 or 364 days. They offer no interest. The return is the difference between the issue price and the redemption value, being the face value.

How it is taxed, and why that is unusual. Because there is no coupon, there is no interest income to tax under income from other sources. Section 10.2.2 states the position directly: profit arising on redemption or transfer of these bills is considered a short-term capital gain, chargeable at the rates applicable in the case of the assessee.

The chapter-end summary table makes the consequence explicit. Against Treasury Bills the column for the period of holding to qualify as a long-term capital asset is left blank, and there is no long-term rate at all — for residents or non-residents. Short-term gains are taxed at the normal tax rate for both.

So there is no path to a concessional long-term rate on a T-Bill. The instrument cannot survive long enough to become a long-term capital asset.

The neighbour it is most often confused with. A Cash Management Bill is also issued at a discount and redeemed at face value, but for a very short period, usually less than 91 days, and it is highly flexible — issued as and when the Government needs cash. A T-Bill's tenors are fixed at 91, 182 and 364 days. Their tax treatment is the same, and the workbook deals with both under one heading.

How most retail money actually reaches a T-Bill. Section 10.3.1 describes money market or liquid funds as investing in liquid instruments such as Treasury Bills and Commercial Papers, and says they suit conservative investors wanting to place a surplus for a short term at a reasonable return.

No default risk. Section 10.2.2 says G-Secs are the safest investment instrument, carrying the Sovereign's commitment for payment of interest and repayment of principal, with practically no risk of default — which is why they are also called risk-free gilt-edged securities.

Return on a T-Bill  =  Face value  -  Issue price

Annualised yield    =  (Face value - Issue price)         365
                       --------------------------  x  ------------
                            Issue price               Days to maturity

Tax:  the whole of that return is a SHORT-TERM capital gain,
      taxed at the rate applicable to the assessee.
      There is no long-term rate for a T-Bill.

The prices below are illustrative; the workbook gives the mechanism and the tenors but does not price a T-Bill.

Ms Deodhar, in the 30% slab, buys a 91-day Treasury Bill with a face value of Rs 10,00,000 at an issue price of Rs 9,84,000.

Face value on maturity          Rs 10,00,000
Issue price paid                Rs  9,84,000
                                 ------------
Return over 91 days             Rs    16,000

Annualised, that is:

16,000 / 9,84,000        = 1.626%  over 91 days
x 365 / 91               = 6.52%   a year

Now the tax. There is no interest to declare. The whole Rs 16,000 is a short-term capital gain, taxed at her normal rate:

Her post-tax yield falls to about 4.56% a year.

What she cannot do about it. She cannot hold the bill for a year to reach a concessional long-term rate. A 91-day bill matures in 91 days, and the longest T-Bill runs 364 days — still short of the 12 months a listed dated G-Sec needs to qualify as a long-term capital asset. Had she bought a listed dated G-Sec instead and held it for more than 12 months, the gain on sale would have been long-term at 12.5%, and the coupon would have been taxable as interest along the way. The T-Bill trades away that rate for certainty over 91 days.

Chapter 10 (Taxation of Debt Products), section 10.2.2 on Government Securities, lists the four types — Cash Management Bills, Treasury Bills, Dated G-Secs and State Development Loans — and then gives "Taxability of Cash Management Bills and T-bills" as a heading of its own. Section 10.3.1 names Treasury Bills as what money market and liquid funds hold. The chapter-end summary table shows the blank long-term column that the whole term turns on.

Expect a question on the three tenors, a question on whether a T-Bill carries interest (it does not), and a computation asking for the head and rate of tax on the gain — short-term capital gain at the assessee's normal rate, never a concessional long-term rate.

• A T-Bill pays no interest. The return is entirely the discount, so there is no interest-on-securities income to tax and no TDS question under Section 193 about a coupon that does not exist.
• The gain is always short-term. The longest T-Bill runs 364 days, so it can never become a long-term capital asset — the summary table has no long-term rate for it.
• Three tenors, and they are 91, 182 and 364 days. Not 90, not 180, not 365.
• Cash Management Bills are not Treasury Bills. CMBs run for a very short period, usually less than 91 days, and are issued as the Government's cash needs arise. The tax treatment is identical; the instruments are not.
• Only the Central Government issues T-Bills. State Governments issue only bonds, called State Development Loans.
• "Less than 1 year" is the dividing line of the whole family — below it, bills; at or above it, dated securities and bonds.
• Safe does not mean tax-free. Sovereign backing removes default risk, not the tax on the gain. That is a different thing again from a tax-free bond, whose interest is exempt under Section 10 while its capital gains remain chargeable.