Treasury Bills: Types, Features, Working, Advantages & More| UPSC Notes

Treasury bills in India are short-term money market instruments functioning as promissory notes with assured repayment in the future. The funds raised through these instruments serve the government's short-term needs, effectively contributing to the reduction of the country's overall fiscal deficit. These bills are short-term borrowing tools, with a maximum tenure of 364 days, and are offered at a discounted value compared to the nominal value of government securities (G-sec). Importantly, they carry zero coupons or interest rates.

The Treasury Bills UPSC is one of the important topics for the UPSC IAS Exam. It also covers a significant part of the Economy subject in the General Studies paper-3 syllabus. 

In this article on the Treasury Bills UPSC, we shall study in detail about meaning, types, limitations, and advantages of treasury bills.

What are Treasury Bills in India?

Treasury bills in India, also known as T-bills, are short-term money market instruments. The RBI, on behalf of the government, to curb liquidity shortfalls. It is a promissory note with a guarantee of payment at a later date. The funds collected are usually used for short term requirements of the government. It is also used to reduce the overall fiscal deficit of the country. Treasury bills or T-bills have zero-coupon rates, i.e., no interest is earned on them. Individuals can purchase T-bills at a discount to the face/value. Later, they are redeemed at a nominal value, thereby allowing the investors to earn the difference. Therefore, it is an essential monetary instrument that the Reserve Bank of India uses. It helps RBI to regulate the total money supply in the economy as well as raise funds.

History of Treasury Bills in India

Treasury bills were first issued in India in 1917. They are issued via auctions conducted by the Reserve Bank of India (RBI) at regular intervals. Individuals, trusts, institutions, and banks can purchase T-Bills. But they are usually held by financial institutions. They have a very important role in the financial market beyond investment instruments. Banks give treasury bills to the RBI to get money under repo. Similarly, they can also keep it to fulfill their Statutory Liquid Ratio (SLR) requirements.

Features of Treasury Bills in India

Treasury Bills in India are short-term debt instruments issued by the government with maturities of 91 days, 182 days, and 364 days. They are issued at a discount to face value and redeemed at par, offering assured returns. They provide high liquidity, making them easily tradable in the secondary market. They are considered risk-free due to government backing and they serve as an important tool for managing short-term funding needs and monetary policy.

• Treasury bills can be issued in a physical form as a promissory note or dematerialized form by crediting to an SGL account (Subsidiary General Ledger Account).
• Treasury bills are issued at a minimum price of Rs.25000 and in the same multiples thereof.
• Treasury bills are issued at a discounted price. However, they are redeemed at par value at the time of maturity.
• Individuals, companies, firms, banks, trusts, insurance companies, provident funds, state governments, and financial institutions are eligible to purchase T-bills.
• Treasury bills are highly liquid, negotiable instruments. They are available in both financial markets, i.e., primary and secondary markets.
• The 91-day T-bill follows a uniform auction method, whereas the 364-day T-bill follows a multiple auction method.
• The yields are assured. Hence, they have zero risks of default.
• For treasury bills, the day count is 364 days in a year.
• It also has other characteristics like market-driven discount rate, selling through auction, issued to meet short term cash flow mismatch, assured yield, low transaction cost, etc.

Learn the article on Money Bill here.

Types of Treasury Bills in India

Four types of treasury bills are auctioned. The primary distinction for these treasury bills is their holding period.

14-day Treasury bill

These bills complete their maturity in 14 days from the date of issue. They are auctioned on Wednesday, and the payment is made on the following Friday. The auction occurs every week. These bills are sold in multiples of Rs.1 lakh, and the minimum amount to invest is also Rs.1 lakh.

91-day Treasury bill

These bills complete their maturity in 91 days from the date of issue. They are auctioned on Wednesday, and the payment is made on the following Friday. They are auctioned every week. These bills are sold in multiples of Rs.25000, and the minimum amount to invest is also Rs.25000.

182-day Treasury bill

These bills complete their maturity in 182 days from the date of issue. They are auctioned on Wednesday, and the payment is made on the following Friday when the term expires. They are auctioned every alternate week. These bills are sold in multiples of Rs.25000, and the minimum amount to invest is also Rs.25000.

364-day Treasury bill

These bills complete their maturity 364 days from the date of issue. They are auctioned on Wednesday, and the payment is made on the following Friday when the term expires. They are auctioned every alternate week. These bills are sold in multiples of Rs.25000, and the minimum amount to invest is also Rs.25000.

As mentioned above, the holding period for each bill remains constant. However, the face value and the discount rates of treasury bills can change periodically. This depends on the funding requirements and monetary policy of RBI, along with the total bids received.

Also, the Reserve Bank of India issues treasury bills calendar for auction. It announces the exact date of the auction, the amount to be auctioned, and the maturity dates before every auction.

Learn how a bill is passed in the Indian parliament here.

Working of Treasury Bills in India

Treasury bills are issued at a discount to the original value, and the buyer gets the original value upon maturity. For example, a Rs 100 treasury bill can be availed of at Rs 95, but the buyer is paid Rs 100 on the maturity date. The return on the treasury bill depends on the liquidity position in the economy. When there is a liquidity crisis, the returns are higher, and vice versa.

The yield on Treasury Bills

The yield generated by a Treasury Bill can be computed using the following formula:

where Y denotes the percent of return.

F = face value of the treasury bill

P = Purchase price of a security at a discount, and

D= The term of a bill

Learn the difference between ordinary bills and money bills here.

How to Invest in Treasury Bills in India?

Investing in treasury bills in India involves a simple process through authorized channels. Individuals keen on investing in treasury bills can approach recognized entities like commercial banks and primary dealers or participate in auctions conducted by the Reserve Bank of India (RBI). A Demat account and submission of necessary documentation, including KYC details, are prerequisites. Treasury bills in India are available in varying tenures, typically 91 days, 182 days, and 364 days. 

To invest, one needs to participate in the auction by specifying the desired amount and bid yield. Successful bids result in the allocation of treasury bills, which are held in Demat form, offering a secure investment avenue. Regularly monitoring auction schedules facilitates investing in treasury bills in India effectively.

Who can Invest in Treasury Bills in India?

Treasury bills in India can be invested by anyone who wants to secure their surplus funds in a safe and reliable investment. It is particularly suitable for individuals who are risk-averse and prefer low-risk options.

Learn the article on finance bills here.

How to Buy Treasury Bills in India?

T-bills are issued in the primary market through RBI auctions. A qualified investor may participate in a competitive or non-competitive bidding auction.

Competitive Bidding

Competitive bidders who maintain funds or current accounts and securities accounts (Subsidiary General Ledger (SGL) account) with RBI are members of the E-Kuber Platform. Institutional investors, such as financial institutions, banks, mutual funds, primary dealers, and insurance companies, are eligible to make competitive bids.

Non-Competitive Bidding

Non-competitive bidders can be individuals, HUF/trusts, firms, corporate bodies, institutions, provident funds, and any other parties. Non-competitive bidders can participate in the auctions without having to quote the price/ yield. Hence, one doesn’t have to worry about whether the bid is on or off the mark. The bidder will be allotted partially or fully in accordance with the plan.

Learn the Difference between a finance bill and a money bill here.

Where can I buy treasury bills in India?

In India, purchasing treasury bills is facilitated through authorized channels. Individuals can buy treasury bills from designated entities such as commercial banks and primary dealers or participate in auctions organized by the Reserve Bank of India (RBI). These entities serve as avenues for acquiring treasury bills in various tenures, typically 91 days, 182 days, and 364 days.

To procure treasury bills in India, individuals need a Demat account and must provide requisite documentation, including KYC details. Keeping an eye on auction schedules and engaging with these authorized entities allows one to easily access and buy treasury bills in India, providing a secure investment opportunity.

Learn the article on Lapsing of bills here.

Are treasury bills Taxable in India?

In India, treasury bills are subject to taxation based on the interest earned. The income generated from treasury bills is categorized under the heading "Income from Other Sources" and is liable for taxation as per the individual's income tax slab rates. The interest earned on treasury bills is considered as part of the individual's total income and is taxed accordingly. 

However, there is no specific provision for deducting tax at source on treasury bills. It's essential to include the interest earned from treasury bills while filing income tax returns to ensure compliance with the taxation regulations in India.

Learn the article on Assent to Bills here.

Advantages of Treasury Bills in India

Treasury Bills in India are short-term government securities that offer several advantages, including high liquidity, safety, and competitive returns. This makes them an attractive option for investors seeking secure and flexible investment opportunities. 

• Treasury bills are a popular short term government security. The Central government backs them. They act as a liability to the Indian government as they need to be paid within a stipulated time.
• Investors have total security on their funds invested as they are backed by the government of India, I.e., the highest authority in the country.
• The Treasury bill helps in raising money for short-term requirements for the economy. Individuals who are looking for short-term investments can park their funds here.
• Also, T-bills can be sold in the secondary market. This allows investors to convert their holdings into cash during any emergency.
• Treasury bills are usually auctioned by the RBI every week. This increases the exposure of investors to the government bond market, which creates higher cash flows to the capital market.

Study about the Public sector undertakings (PSUs) here.

Limitations of Treasury Bills in India

Compared to other stock market investment tools, treasury bills yield lower returns as they are government-backed debt securities. Treasury bills are zero-coupon bonds, i.e., no interest is paid on them to investors. They are issued at a discount and redeemed at face value. Therefore, the returns earned by investors in T-bills remain fixed throughout the bond tenure, irrespective of the economic condition of the country.

Stock market variations influence the returns generated by equity, equity funds, debt funds, and debt instruments. Subsequently, when the stock market moves upwards, the yield generated by equity, equity fund, debt fund, or debt instruments is also higher. However, the returns generated by T-bills remain fixed irrespective of the financial market movements.

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Differences between Bond and Treasury Bill

Bonds and Treasury Bills are both debt instruments, but they differ significantly. Bonds are long-term securities with maturities typically ranging from 2 to 30 years and pay periodic interest (coupons). Treasury Bills (T-Bills), on the other hand, are short-term instruments. They are issued solely by the government, with maturities up to one year (91, 182, or 364 days). 

Differences between Bond and Treasury Bill
Feature	Bond	Treasury Bill
Definition	Long-term debt instruments issued by corporations or governments with fixed interest payments and a specified maturity date.	Short-term debt instrument issued by the government with maturities of up to one year and issued at a discount to face value.
Maturity	Typically longer than one year, often ranging from 2 to 30 years.	Up to one year (91 days, 182 days, 364 days).
Interest Payment	Pays periodic interest (coupon) over its term.	No periodic interest; issued at a discount and redeemed at face value.
Risk	Higher risk depending on issuer's creditworthiness.	Lower risk, as they are backed by the government.
Liquidity	Moderate to high, but depends on the market.	High liquidity, easily tradable in the money market.
Investment Purpose	Suitable for long-term investment and income generation.	Suitable for short-term investment and liquidity management.

Differences between Treasury Bills and Commercial Bills

Treasury Bills and Commercial Bills are short-term debt instruments but serve different purposes. Treasury Bills are issued by the government to meet short-term funding needs and are considered low risk due to government backing. Commercial Bills, issued by financial institutions, are used to manage short-term funding requirements.

Differences between Treasury Bills and Commercial Bills
Feature	Treasury Bill	Commercial Bill
Issuer	Government	Corporations or financial institutions.
Maturity	Up to one year (91 days, 182 days, 364 days).	Typically short-term, usually up to 90 days.
Purpose	To manage short-term government funding needs.	To manage short-term corporate funding needs.
Security	Backed by the government, hence low risk.	Not backed by the government, hence higher risk.
Discount Rate	Generally lower, reflecting low risk.	Higher discount rate due to higher credit risk.
Market	Primarily traded in the money market.	Traded in the money market but less liquid compared to Treasury Bills.
Interest	No periodic interest; issued at a discount and redeemed at face value.	No periodic interest; issued at a discount and redeemed at face value.

Learn the Difference between Money Bill and Ordinary Bill!

Treasury Bills vs Government Securities

Treasury Bills (T-Bills) and Government Securities (G-Secs) are both issued by the government but cater to different investment needs. T-Bills are short-term instruments with maturities up to one year and do not pay periodic interest. Government Securities, in contrast, are long-term instruments with maturities ranging from 1 to 30 years and pay periodic interest (coupons).

Treasury Bills vs Government Securities
Feature	Treasury Bills	Government Securities
Definition	Short-term debt instruments issued by the government with maturities of up to one year.	Long-term debt instruments issued by the government with maturities ranging from 1 to 30 years or more.
Maturity	Up to one year (91 days, 182 days, 364 days).	Typically longer than one year, often up to 30 years.
Interest Payment	No periodic interest; issued at a discount and redeemed at face value.	Pays periodic interest (coupon) over its term.
Risk	Very low risk, backed by the government.	Very low risk, backed by the government.
Liquidity	High liquidity, easily tradable in the money market.	Generally high liquidity, but depends on the specific security and market conditions.
Investment Purpose	Suitable for short-term investment and liquidity management.	Suitable for long-term investment and income generation.
Return	Lower returns due to shorter maturity and lower risk.	Higher returns due to longer maturity and periodic interest payments.
Market	Primarily traded in the money market.	Traded in both the primary and secondary markets.
Issuer	Issued only by the government.	Issued only by the government.

Conclusion

Treasury bills in India stand as crucial money market instruments issued by the government to address short-term financial needs. With a maximum tenure of 364 days and offered at a discounted value without interest, these bills play a significant role in managing the country's fiscal deficit. As a reliable tool for short-term borrowing, Treasury bills contribute to the overall financial stability and liquidity of the Indian economy, showcasing their importance in the government's financial management strategy.

Read the article on Assent to Bills!

Key Takeaways for UPSC Aspirants Definition and Nature: Treasury Bills (T-Bills) are short-term debt instruments issued by the government to meet its short-term borrowing requirements. They are typically issued with maturities of 91 days, 182 days, and 364 days. Issuing Authority: In India, T-Bills are issued by the Reserve Bank of India (RBI) on behalf of the central government. They are part of the government’s monetary policy tools to manage liquidity in the economy. Non-Interest Bearing: T-Bills are zero-coupon securities, meaning they do not pay interest. Instead, they are issued at a discounted price and redeemed at face value upon maturity, with the difference representing the yield. Liquidity and Safety: T-Bills are highly liquid and considered one of the safest investment options because they are backed by the government. They can be easily traded in the secondary market, providing investors with flexibility and liquidity. Investment and Returns: The return on T-Bills, known as the yield, is determined by the discount rate at which they are issued. The shorter the maturity period, the lower the yield, and vice versa. T-Bills typically offer lower returns compared to long-term government securities. Participants and Eligibility: T-Bills can be bought by individuals, institutions, banks, mutual funds, and other entities. They are popular among conservative investors looking to park surplus funds temporarily due to their safety and liquidity. Primary and Secondary Markets: T-Bills are issued through auctions conducted by the RBI, held on a weekly basis. In the primary market, they are sold to the highest bidder, while in the secondary market, they can be traded before maturity. Role in Monetary Policy: T-Bills play a crucial role in the government’s monetary policy. They help in managing the money supply, controlling inflation, and financing the fiscal deficit without resorting to higher levels of borrowing from the public.

We hope your doubts regarding the topic of Treasury Bills in India have been addressed after going through the above article. Testbook offers good quality preparation material for different competitive examinations. Succeed in your UPSC IAS exam preparations by downloading the Testbook App here!