T-bills or treasury bills are just another way by which the government raises money, usually to manage cash flow or address temporary funding needs.
They typically have maturities ranging from a few days to one year, with options being 91 days, 182 days, or 364 days. Now, investors like us can buy these T-bills.
How do you earn profits?
T-bills are short-term debt instruments, however unlike bonds, these do not pay interest. Rather, they are issued at a discounted price and redeemed at face value. On maturity, the difference between these two amounts would become your profits.
How is income from T-bills taxed?
There’s a common confusion and people do have different opinions about whether income from T-bills will be classified as interest income or capital gains.
See, because you are buying T-bills and then redeeming them (or selling in the secondary markets), the income will be treated as capital gains.
Now, the capital gains tax rate for various assets depends on two things, your holding period and the type of asset. For all types of debt instruments,
- If holding period > 24 months, gains will be long-term and taxed at 12.5%.
- If holding period < 24 months, gains will be short-term and taxed at slab rates.
Now because T-bills are issued for a maximum period of 364 days, the gains will always be classified as short-term and will be taxed at your applicable slab rate.
Here’s an example.
Let’s say you buy a 91-day T-bill at an issue price of ₹950 which has a face value of ₹1000. At the end of the 3 months, the T-bill matures, and you’ll receive the full face value of ₹1,000. In this case, your short-term capital gains will be ₹50 and will be taxed at your applicable slab rate.
The minimum investment on T bills, as per the RBI’s guidelines, is Rs 25,000. Higher investments can also be made in multiples of Rs 25,000.