Treasury Bills Auction Oct 2026: Income Tax & TDS Rules for Investors

What Happened?

The Reserve Bank of India (RBI) has announced an auction of Government of India Treasury Bills on October 7, 2026. The auction covers three categories: 91-Day Bills (₹8,000 crore), 182-Day Bills (₹8,000 crore), and 364-Day Bills (₹7,000 crore), totaling ₹23,000 crore. Individual retail investors can now participate in this auction through the Retail Direct portal, with allocation restricted to maximum 5% of the notified amount per category. Settlement will happen on October 8, 2026.

Background & Legal Context

Treasury Bills (T-Bills) are short-term Government of India securities issued by RBI on behalf of the Government. They are Zero-Coupon instruments, meaning they do not pay periodic interest. Instead, investors purchase them at a discount to face value and receive the full face value on maturity. The difference represents the return or interest income.

Income Tax Treatment under Income Tax Act 2025:

• Section 194A (TDS on Savings Account Interest): While this section primarily applies to savings account interest, understanding it is important for comparison with T-Bills income treatment.
• Section 56 (Income from Other Sources): Income earned from Treasury Bills is taxable as "Income from Other Sources" under this section. The gain (difference between sale/maturity price and purchase price) is treated as income in the year of maturity or sale.
• Section 55(2) (Cost of Acquisition): The purchase price of T-Bills is your cost of acquisition. The discount at which you purchase is not separately taxed; only the actual gain at maturity is taxable.
• No TDS Requirement: Unlike bank deposits or other interest-bearing securities, NO TDS is deducted by RBI on Treasury Bills. This is because T-Bills are government securities and TDS provisions under Section 194A do not apply to them. The income is reported in your ITR for the year of maturity.
• Securities Transaction Tax (STT): If you sell T-Bills before maturity in the secondary market, no STT applies (as per Finance Act). However, the gain is still taxable as income from other sources.

Key Provisions for Assessment Year 2025-26 and 2026-27:

If you purchase T-Bills in the current auction (October 2026):

• 91-Day Bills: Will mature in early January 2027. The interest income will be taxable in Assessment Year 2027-28 (Financial Year 2026-27).
• 182-Day Bills: Will mature in late March/early April 2027. The income will be taxable in Assessment Year 2027-28 (FY 2026-27) or 2028-29 (FY 2027-28) depending on exact maturity date.
• 364-Day Bills: Will mature in October 2027. The income will be taxable in Assessment Year 2028-29 (FY 2027-28).

Eligible Investor Categories: State Governments, Union Territories with legislature, eligible Provident Funds, designated Foreign Central Banks, and Individual Retail Investors can participate. For individuals, allocation is capped at 5% of notified amount per category.

What Does This Mean for You?

For Individual Retail Investors:

• Safe Investment: T-Bills are backed by the Government of India, making them the safest investment available. They carry zero credit risk.
• No TDS Burden: Since no TDS is deducted, you get the full maturity amount. You do not need to arrange for advance tax payments during the year.
• Taxable Income: The discount/gain is taxable as income from other sources at your applicable slab rate. If you are in 20% tax bracket, your effective return after tax will be reduced proportionally.
• Liquidity: T-Bills can be sold in the secondary market before maturity, though you must report any gains/losses in your ITR.
• Investment Limit: You can invest up to 5% of the notified amount (maximum ₹1,150 crore in aggregate across all three tenors in this auction). For practical purposes, individual retail investors typically bid much smaller amounts.

Tax Implications by Investor Category:

• Salaried Individuals: T-Bill income must be declared in "Income from Other Sources" in your ITR Form. This increases your total taxable income and may push you into a higher tax bracket.
• Senior Citizens: If your total income (including T-Bill gains) is below ₹5 lakh (or ₹7 lakh if age 75+), you may not need to file ITR, but it is advisable to file for the return of TDS (if any) or to maintain records.
• NRIs: NRIs investing in T-Bills will pay tax at flat 20% or 30% depending on treaty benefits and other applicable provisions under Income Tax Act 2025.
• HUFs/Trusts: These entities can also invest in T-Bills, and income is taxable as per their respective tax slabs.

Current Market Context (October 2026):

T-Bill yields are determined by market demand and RBI's monetary policy stance. In the current inflationary scenario, investors must compare T-Bill yields with other fixed-income instruments (Fixed Deposits, Bonds, etc.) and factor in the tax impact before investing.

What Should You Do Now?

Step 1: Verify Your Eligibility

• Confirm you are an individual retail investor eligible to participate on non-competitive basis.
• Ensure you have a Permanent Account Number (PAN) and are compliant with income tax filings.

Step 2: Calculate Your Expected Returns After Tax

• Determine the discount/yield offered in the auction.
• Apply your applicable tax slab rate to calculate after-tax return.
• Compare with other investment options available to you.

Step 3: Complete Auction Formalities

• Register on the Retail Direct portal before October 7, 2026.
• Submit your non-competitive bid between 12:30 PM and 1:00 PM on October 7, 2026.
• Arrange payment of the purchase amount by October 8, 2026 (settlement date).

Step 4: Maintain Records for Tax Compliance

• Keep the auction confirmation and purchase documents safely.
• Record the purchase price, maturity date, and expected interest income.
• When T-Bills mature, note the maturity amount and compute the gain (maturity amount minus purchase price).
• Declare the interest income in your ITR for the relevant Assessment Year.

Step 5: Plan for Secondary Market Sale (if applicable)

• If you sell T-Bills before maturity, note the sale price and date.
• Calculate the gain/loss (sale price minus purchase price).
• Declare this in your ITR as "Income from Other Sources".
• No STT applies, but income tax does.

Key Takeaways

• No TDS on T-Bills: Reserve Bank does not deduct TDS on Treasury Bills. You receive the full maturity amount and declare interest income in your ITR.
• Taxed as Other Income: T-Bill gains are taxable under Section 56 of Income Tax Act 2025 as "Income from Other Sources" at your applicable slab rate.
• Safe Government Security: T-Bills carry zero credit risk and are backed by the Government of India, making them ideal for risk-averse investors.
• Assess Year Timing: 91-day bills will have income taxable in AY 2027-28, 182-day in AY 2027-28 or 2028-29, and 364-day in AY 2028-29, depending on maturity date.
• Compare After-Tax Returns: Always calculate your after-tax return after applying your income tax slab before investing to ensure better returns compared to other fixed-income options.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602