T-Bill Auction 2026: Income Tax on Treasury Bills Interest

What Happened?

The Treasury Bill (T-Bill) auction for 91-day, 182-day, and 364-day instruments was successfully completed in September 2026. The Government of India notified and accepted the full face value across all three tenors: ₹9,000 crore (91-day), ₹8,000 crore (182-day), and ₹7,000 crore (364-day). The cut-off yields ranged from 5.28% (91-day) to 6.04% (364-day), reflecting the current monetary policy stance. This is significant for individual taxpayers, corporate entities, banks, and mutual funds investing in government securities.

Background & Legal Context

Treasury Bills are short-term debt instruments issued by the Government of India, typically with maturities of 91, 182, or 364 days. They are sold at a discount to face value, and the difference between the purchase price and redemption value constitutes the interest income. Under the Income Tax Act 2025, this interest income is taxable in the hands of the investor.

Key Tax Provisions Applicable to T-Bill Income:

• Section 2(43) of IT Act 2025: Defines "income" which includes interest income from government securities like T-Bills.
• Section 56(2) of IT Act 2025: Interest income is taxable as "income from other sources" if the investor holds T-Bills as an investment (not in business).
• Section 194A (TDS on Interest): If T-Bills are held through banks or intermediaries, Tax Deducted at Source (TDS) may apply at 10% (subject to valid PAN and residential status).
• Section 80TTA (Interest from Savings): Senior citizens (age 60+) can claim a deduction up to ₹50,000 on interest income from savings accounts and T-Bills, provided certain conditions are met. This was retained in IT Act 2025.
• Section 80TTB (Interest for Very Senior Citizens): Very senior citizens (age 80+) can claim a deduction up to ₹1,00,000 on interest income from deposits and securities like T-Bills.
• Old Section 55(2)(xvi) of IT Act 1961: Still applicable for grandfathering benefits on capital gains from certain securities, though T-Bills typically don't attract capital gains treatment.

Assessment Year Context (AY 2026-27): Income earned from T-Bills purchased in FY 2026-27 (April 2026 to March 2027) will be assessed in AY 2026-27. If you purchased T-Bills in the recent auction (September 2026), the accrued interest until March 31, 2027 is taxable in AY 2026-27.

What Does This Mean for You?

For Individual Investors:

If you have invested in the recent T-Bill auction or plan to do so, the interest income you earn is taxable as per your slab rate. For example:

• If you are in the 20% tax bracket, the effective return on a 364-day T-Bill offering 6.04% YTM would be approximately 4.83% after tax (6.04% × 0.80).
• If you are a senior citizen (age 60+), you can claim a deduction of up to ₹50,000 under Section 80TTA on interest from T-Bills and other eligible savings, reducing your taxable income.
• TDS at 10% will be deducted if you hold T-Bills through a bank or depository, provided your bank has your valid PAN. You can claim this TDS as a credit against your tax liability.
• Non-residents investing in T-Bills will face different tax treatment and may attract higher withholding tax rates (typically 20% under Section 195).

For Corporate Investors:

Companies holding T-Bills as short-term investments must recognize the interest income in their Profit & Loss statement. Under the IT Act 2025:

• Interest income is taxable at the applicable corporate tax rate (currently 22% for domestic companies, or 25.17% with surcharge and cess for FY 2026-27).
• No TDS exemption is available for companies under Section 194A(1)(f), so TDS of 10% will still be deducted, but recoverable as credit.
• If the T-Bill is held as inventory for business purposes (e.g., by money market funds or dealers), different accounting standards may apply.
• Under Section 28(iv) of IT Act 2025, if T-Bills are held by a mutual fund classified as a business, the entire realized gain is taxable.

For Senior Citizens & Retirees:

T-Bills are an attractive investment for retirees seeking stable returns with government backing. The tax advantage under Section 80TTA/80TTB makes them even more attractive:

• A senior citizen with T-Bill interest income of ₹60,000 can claim a deduction of ₹50,000, leaving only ₹10,000 taxable.
• A very senior citizen can claim up to ₹1,00,000 deduction, providing substantial tax relief.
• Ensure your bank has your valid PAN for TDS compliance; otherwise, TDS may be deducted at the highest slab rate (30%).

For Mutual Funds & HUFs:

Mutual funds holding T-Bills must classify them correctly in their portfolio. Non-debt mutual funds holding T-Bills may trigger different tax treatment for unit holders. HUFs (Hindu Undivided Families) are treated as separate tax entities and can benefit from the same provisions as individuals.

What Should You Do Now?

Action Items for Taxpayers:

• Verify PAN with Bank/Depository: Before your T-Bill holdings are credited, ensure your bank or depository has your valid PAN. This prevents TDS at the highest rate.
• Track Interest Accrual: Maintain records of the exact interest accrued and received on each T-Bill maturity. For 91-day and 182-day bills maturing within FY 2026-27, interest is taxable in AY 2026-27.
• Plan for Section 80TTA/80TTB Claims: If you are a senior citizen, calculate your total interest income from all eligible sources. If it exceeds ₹50,000 (or ₹1,00,000 for very senior citizens), adjust your investments accordingly to maximize tax deduction benefits.
• Collect TDS Certificate: Request Form 16A from your bank for TDS deducted on T-Bill interest. Use this to file your income tax return and claim credit for taxes already paid.
• File ITR Accurately: In your Income Tax Return (ITR) for AY 2026-27, report all T-Bill interest income under "Income from Other Sources" (Schedule OIS in ITR-2). Claim deductions under Section 80TTA or 80TTB if applicable.
• Consider Holding Period: Since T-Bills are issued at discount and redeemed at face value (not capital gains), there is no long-term capital gains benefit. The entire gain is taxable as interest income, so tax planning should focus on the timing of income recognition.
• Non-Residents (NRIs/PIOs): If you are a non-resident, consult a tax expert regarding TDS implications under Section 195 and tax treaty benefits that may apply.

Key Takeaways

• Interest Taxability: Interest income on T-Bills is taxable as "income from other sources" under Section 56(2) of IT Act 2025 at your applicable slab rate. There is no concessional rate.
• TDS at 10%: TDS is deducted at 10% when T-Bills are held through intermediaries, provided PAN is available. This is recoverable as tax credit.
• Senior Citizen Benefit: Senior citizens (age 60+) can claim a deduction up to ₹50,000 under Section 80TTA on eligible interest, reducing taxable income significantly.
• Very Senior Citizen Relief: Citizens aged 80+ can claim a deduction up to ₹1,00,000 under Section 80TTB, providing substantial tax relief on T-Bill interest.
• AY 2026-27 Reporting: Interest accrued on T-Bills maturing by March 31, 2027 must be reported in your AY 2026-27 ITR. Maintain receipts of purchase confirmations and maturity statements.

Important Reminder: The interest income from T-Bills is NOT eligible for the lower tax rate applicable to long-term capital gains. It is taxed as regular income. However, the safety of government-backed instruments, combined with tax deduction benefits for senior citizens, makes T-Bills an attractive option in your overall tax-efficient investment strategy.

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