Treasury Bills 2026: Income Tax on T-Bills Interest & TDS Rules

What Happened?

The Reserve Bank of India has announced an auction of Government of India Treasury Bills (T-Bills) scheduled for September 30, 2026, with a total notified amount of ₹24,000 crore. The auction includes three categories: 91-day T-Bills (₹9,000 crore), 182-day T-Bills (₹8,000 crore), and 364-day T-Bills (₹7,000 crore). Settlement will occur on October 1, 2026. Both individuals (retail investors) and institutional entities are eligible to participate on both competitive and non-competitive bases through electronic bidding on the RBI's Core Banking Solution system.

Background & Legal Context

What are Treasury Bills?

Treasury Bills are short-term debt instruments issued by the Government of India through the RBI. They are discounted securities (sold below face value) that mature at par. The difference between the purchase price and face value is the interest earned by the investor.

Income Tax Treatment Under IT Act 2025

The income earned from Treasury Bills falls under the category of "Interest on Securities" under Section 194A and related sections of the Income Tax Act 2025. Key points include:

• Nature of Income: The interest income from T-Bills is treated as capital gains if held for short-term, or as income from other sources for computing total income.
• Section 194A (TDS on Interest): For individuals, TDS at the rate of 10% is deducted on interest income from securities issued by the Government of India, including T-Bills. However, if the total interest income does not exceed ₹40,000 (or ₹50,000 for senior citizens above 60 years) in the financial year, the depositor can submit a Form 15H to claim exemption from TDS.
• Section 201 (TDS Liability): If TDS is not deducted or is deducted short, the depositor becomes liable to pay interest on the shortfall, and the Bank/RBI must deposit the TDS within the prescribed time.
• Section 195 (TDS on Foreign Remittances): For non-resident investors, TDS may be deducted at applicable rates as per the Income Tax Act 2025, depending on their residential status and treaty provisions.

Assessment Year Implications (AY 2026-27)

For the fiscal year 2025-26 (Assessment Year 2026-27), the interest received on T-Bills purchased in the auction of September 30, 2026, will be taxable income in the assessment year following the financial year in which the interest accrues. The TDS credit can be claimed in the Income Tax Return filed for AY 2026-27.

Section 56 (Income from Other Sources): If you are holding T-Bills as part of your investment portfolio, the maturity amount (face value) is not separately taxed because it represents the return of your principal. Only the interest component is taxable.

What Does This Mean for You?

For Individual Retail Investors

• TDS at Source: When the T-Bill matures, the RBI will deduct TDS at 10% on the interest portion (difference between face value and purchase price). For example, if you purchase a 91-day T-Bill for ₹9,900 with a face value of ₹10,000, the interest is ₹100, and TDS of ₹10 will be deducted.
• Form 15H Exemption: If your total interest income from all securities (bank deposits, T-Bills, bonds, etc.) in FY 2025-26 is below ₹40,000, you can submit Form 15H before the auction date to avoid TDS. This is beneficial for retired individuals with lower income.
• Allocation Limit: Individual investors can bid on a non-competitive basis with a maximum allocation limit of 5% of the notified amount. This ensures retail investor participation is protected and broad-based.
• Investment Safety: T-Bills are issued by the Government of India, making them zero-default risk. Combined with the tax-efficient interest income structure, they are attractive for conservative investors.
• ITR Filing Requirement: Even if TDS is deducted, you must file an Income Tax Return for AY 2026-27 if your total income exceeds the basic exemption limit (₹3,00,000 for individuals below 60 years).

For HUF and Institutional Investors

• Hindu Undivided Families (HUFs) and other entities can participate on a competitive basis. The interest income earned will be taxable in the hands of the HUF/entity as per applicable tax rates.
• Provident Funds, Foreign Central Banks, and State Governments have special participation rights and may have different TDS applicability based on their status and exemptions under the IT Act 2025.

Tax Planning Angle

T-Bills are particularly attractive for investors seeking to optimize tax liability because:

• The interest income is straightforward and transparent with no hidden costs.
• TDS at 10% is creditable against your total tax liability, reducing your out-of-pocket expense.
• For individuals in lower tax brackets (10-20%), the TDS may be higher than actual tax due, leading to a refund.
• Senior citizens can claim Form 15H exemption if total interest is below ₹50,000, deferring tax outflow.

What Should You Do Now?

Step 1: Assess Your Interest Income Threshold

Calculate your expected interest income from all sources (bank deposits, existing bonds, T-Bills) for FY 2025-26. If it falls below ₹40,000 (₹50,000 for senior citizens), you are eligible for Form 15H exemption.

Step 2: Prepare for T-Bill Participation

If you decide to invest in T-Bills:

• Register yourself on the Retail Direct portal before the auction date.
• Ensure your bank account is linked for the settlement amount to be debited on October 1, 2026.
• Decide whether to bid competitively or non-competitively. Non-competitive bids are easier for retail investors.

Step 3: Claim Form 15H if Eligible

If your total interest income is below the threshold, submit Form 15H to the RBI or your depository bank before September 30, 2026. This will prevent TDS deduction and improve your cash flow.

Step 4: Maintain Records for ITR Filing

Keep the T-Bill purchase confirmation, maturity amount, TDS certificate (Form 16A or equivalent), and interest computation in your records. You will need these when filing your ITR for AY 2026-27.

Step 5: Consult a CA for Tax Optimization

If you have significant interest income or complex financial situations (NRI status, multiple income sources, HUF income), get professional advice on the most tax-efficient allocation between T-Bills and other securities.

Key Takeaways

• TDS at 10%: RBI will deduct TDS on T-Bill interest income for individuals under Section 194A of the Income Tax Act 2025. The TDS is creditable against your total tax liability.
• Form 15H Exemption: If your total interest income is below ₹40,000 (or ₹50,000 for senior citizens) in FY 2025-26, submit Form 15H before the auction to avoid TDS deduction.
• Safety & Simplicity: T-Bills issued by the Government of India carry zero credit risk and have transparent, straightforward tax treatment, making them ideal for conservative, tax-conscious investors.
• AY 2026-27 Impact: Interest income from T-Bills purchased in the September 30, 2026 auction will be taxable in Assessment Year 2026-27. File your ITR to claim TDS credit and avoid penalties.
• Retail Allocation Protection: Individuals are guaranteed a non-competitive allocation of up to 5% of the notified amount, ensuring retail participation is not crowded out by institutional bidders.

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