At 6.85% Yield In 364 Days, Treasury Bills Beat Most Bank Fixed Deposit Schemes, But What Are They?

The cut-off yield of Reserve Bank of India’s (RBI) Treasury bills (T-bills) maturing in 364 days or yield-to-maturity currently stands at 6.87 per cent, which most fixed deposit schemes do not give in a year.

The RBI’s latest cut-off yield per bill for 91 days, 182 days, and 364 days were Rs 98.4178, Rs 96.7424, and Rs 93.5795, respectively. The T-bills’ face value generally stays at Rs 100.

But how is the yield calculated, or how much tax would you pay for interest income, and where can you purchase these bills? We tackle some of these commonly asked questions below.

How Are T-Bill Yields Calculated?

T-bills are short-term money market instruments issued by the RBI on behalf of the government. These bills are available for three tenors: 91 days, 182 days, and 364 days. T-bills are redeemed at a face value of Rs 100, issued at a discount to the cut-off yield price. Hence, they are also called zero-coupon bonds.

The following is the formula to calculate T-bill yield:

Yield = (100 – Purchase price) ÷ purchase price × (365 days ÷ 91 days) × 100

Let us understand this with an example.

As mentioned in a press release by the RBI, the cut-off price for a 91-day T-bill is Rs 98.4178. Given the face value is always Rs 100, we subtract Rs 98.4178 from Rs 100, which comes to Rs 1.5822. This amount is your interest from each 91-day T-bill worth Rs 100.

Calculation as per last Wednesday’s T-bill auction cut-off:

Yield = [(100-98.4178) ÷ 98.4178] * (365/91) × 100

= (0.01607636) × (4.01098901) × 100

= 6.4482%

Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap, a debt advisory firm, said that various factors influence interest rates yields. For example: inflation, economic growth rate, US Fed decisions, INR-$ rate, oil and geopolitical situations, demand supply factor, government / RBI comfort on traded yields and so on.

Taxation of T-bills

Since T-bills are issued at a discount and redeemed at a nominal (face/par) value on its maturity. The difference between the discounted issue price and the face value redeemed on maturity is gain for investors.

Gaurav Makhijani, senior tax advisor, Roedl and Partner, a tax consultancy firm, said that since T-bills are issued for tenors from 91 to 364 days, there is always a short-term capital gain, which is taxable as per the applicable tax slabs of an individual.

As per the Income-Tax Act, a taxpayer can claim any expenditure incurred wholly and exclusively in connection with the transfer while computing capital gains.

“Accordingly, any directly attributable expenditure, such as brokerage, should be available as a deduction while computing the capital gain amount,” Makhijani added.

Where To Buy T-bills?

RBI has a dedicated platform, RBI retail direct, to facilitate retail investors’ transactions in various central and state government bonds, treasury bills, and sovereign gold bonds.

However, one could also buy T-bills through stock brokers. The bills will be held in your Demat account upon successful allotment, and funds will be used from your trading account. The maturity proceeds and interest payments will be made directly to the investor ’s bank account.

However, do note that this method entails a brokerage charge and GST too. For example, Zerodha will charge 0.06 per cent or Rs 6 for every Rs 10,000 invested as brokerage. Also, 18 per cent GST will be applicable on the total brokerage incurred.