Treasury Bills Auction 2026: Tax Guide for Individual Investors

What Happened?

The Reserve Bank of India (RBI) has announced an auction of Government of India Treasury Bills on September 09, 2026. The auction includes three categories: 91-Day (₹9,000 crore), 182-Day (₹8,000 crore), and 364-Day (₹7,000 crore) Treasury Bills, totaling ₹24,000 crore. Individual retail investors can now participate on a non-competitive basis through the Retail Direct portal, with allocation restricted to a maximum of 5 percent of the notified amount. Settlement and payment will occur on September 10, 2026.

Background & Legal Context

What Are Treasury Bills?

Treasury Bills are short-term debt instruments issued by the Government of India to raise funds. They are sold at a discount to face value, and the difference between the purchase price and redemption value represents the interest income earned by the investor. They are one of the safest investment instruments in India, backed by the sovereign guarantee of the Government of India.

Income Tax Act 2025 Provisions

Under the Income Tax Act 2025, the income earned from Treasury Bills is taxable as interest income under Section 56 (Income from Other Sources). The key sections relevant to Treasury Bill investments are:

• Section 56(1)(iv) of IT Act 2025: Income from interest on Government securities, including Treasury Bills, is taxable as income from other sources.
• Section 193 (TDS on Interest on Securities): Tax Deducted at Source (TDS) is applicable on interest payments from Government securities at the rate of 10 percent (or lower slab rates if applicable).
• Section 194A (TDS on Interest Other than Securities): Though primarily for banks and post offices, this section can apply in certain scenarios.
• Section 115 BAC (Concessional Tax Rate): Individuals may be eligible for a concessional tax rate of 25.2 percent (including surcharge and cess) under special provisions, though this requires specific conditions to be met.

TDS Compliance

When the Government of India makes interest payments on Treasury Bills to individual investors, it will deduct TDS at the applicable rate. However, if your total income falls below the exemption limit (₹2.5 lakh for AY 2025-26 and AY 2026-27 for individuals below 60 years), you can submit an exemption certificate to avoid TDS deduction.

What Does This Mean for You?

For Individual Retail Investors

If you are planning to invest in Treasury Bills through this auction, here are the key tax implications you need to understand:

• Taxable Income Classification: The discount gain (difference between purchase price and redemption value) is treated as interest income and taxed as income from other sources under Section 56 of the Income Tax Act 2025. This means it will be added to your total income and taxed at your applicable slab rate.
• TDS Reduction: TDS on interest income from Treasury Bills is deductible at 10 percent (or lower slab rates based on your income). If you are a senior citizen (60+ years), the basic exemption limit is ₹3 lakh, which may reduce your TDS liability.
• Short-Term Investment Benefit: Treasury Bills are short-term instruments. Once they mature, you receive the full face value. The entire income is classified as interest income, and there is no separate capital gains treatment. This simplifies your tax filing process.
• No Long-Term Capital Gains Tax: Since Treasury Bills are Government securities, they do not attract long-term capital gains tax under Section 112A of the IT Act 2025, even if held beyond one year. This is a significant benefit compared to other investment options.
• Deduction Under Section 80C: Treasury Bills purchased through this auction do not qualify for deduction under Section 80C (Life Insurance and Specified Investments). However, if you invest in National Savings Certificates (NSC) or other specified securities, Section 80C benefits may apply.
• Portfolio Diversification: From a tax planning perspective, Treasury Bills offer a safe, liquid investment option with guaranteed returns. For Assessment Year 2026-27, individual investors seeking to diversify their portfolio while managing tax liability can consider Treasury Bills as part of their investment strategy.

For Senior Citizens (60+ years)

Senior citizens investing in Treasury Bills get a higher exemption limit of ₹3 lakh (for AY 2025-26 and AY 2026-27), which reduces their TDS liability. Additionally, they can file ITR-1 (Sahaj) if Treasury Bills are their only source of income, simplifying compliance.

For HUF (Hindu Undivided Family)

HUF investors can also participate in the Treasury Bills auction. The income from Treasury Bills in the hands of HUF will be taxed as income from other sources under Section 56, similar to individuals. The HUF basic exemption limit is ₹2.5 lakh for AY 2025-26 and AY 2026-27.

What Should You Do Now?

Step 1: Assess Your Tax Bracket

Before investing in Treasury Bills, calculate your expected total income for AY 2026-27. If your income falls below the exemption threshold (₹2.5 lakh for individuals, ₹3 lakh for senior citizens), you can claim TDS exemption by submitting Form 15G or Form 15H to the RBI or the issuing authority.

Step 2: Plan for TDS Impact

If TDS will be deducted on your Treasury Bill interest income, ensure you have sufficient funds to cover this liability. The TDS amount can be adjusted while filing your ITR. If the TDS exceeds your actual tax liability, you will get a refund.

Step 3: Maintain Proper Documentation

Keep all Treasury Bill investment confirmations, interest payment statements, and TDS certificates (Form 16A) for income tax compliance. These documents are essential for filing your ITR and claiming TDS credit under Section 106 of the IT Act 2025.

Step 4: File ITR Accurately

While filing your ITR for AY 2026-27, disclose the Treasury Bill interest income under the "Income from Other Sources" section (Schedule S). Claim TDS credit for the TDS deducted by the Government. Use ITR-1 (Sahaj) if Treasury Bills are your only income source; otherwise, use ITR-2 or ITR-3.

Step 5: Consider Tax-Efficient Investing

From a tax planning perspective, evaluate whether Treasury Bills fit your overall investment strategy. If you are in a higher tax bracket, consider investing through tax-saving instruments like Sukanya Samriddhi Yojana (for daughters under Section 80C) or Public Provident Fund (Section 80C) alongside Treasury Bills.

Key Takeaways

• Treasury Bill income is taxable: The discount gain from Treasury Bills is classified as interest income under Section 56 of the Income Tax Act 2025 and taxed at your applicable slab rate.
• TDS is mandatory at 10 percent: The Government will deduct TDS at 10 percent on interest payments. You can claim exemption if your income is below the exemption threshold by submitting Form 15G/15H.
• No capital gains tax on Government securities: Treasury Bills do not attract long-term capital gains tax under Section 112A, even if held beyond one year, making them a tax-efficient investment option.
• TDS can be claimed as credit: The TDS deducted on Treasury Bill interest can be adjusted against your total tax liability while filing ITR. If TDS exceeds your liability, you get a refund.
• Documentation is critical: Maintain all Treasury Bill investment confirmations, interest statements, and TDS certificates for proper income tax compliance and to support your ITR filing for AY 2026-27.

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