Treasury Bills Investment 2026: Tax & Income Tax Implications

What Happened?

On 14 October 2026, the Treasury Bills auction concluded with oversubscription across all three tenures. The 91-day, 182-day, and 364-day bills attracted competitive and non-competitive bids totaling ₹19,609 crore, ₹15,326 crore, and ₹11,790 crore respectively. Cut-off yields ranged from 5.73% to 6.49% per annum. This is the most recent auction update that directly impacts your investment portfolio and tax liability for Assessment Year 2026-27.

Background & Legal Context

Treasury Bills (T-Bills) are short-term debt instruments issued by the Government of India. They are zero-coupon securities, meaning you don't receive periodic interest payments. Instead, you purchase them at a discount to face value and receive the full face value at maturity. The difference between purchase price and maturity value represents your income.

Income Tax Act 2025 – Key Sections Applicable:

• Section 194A (Interest on Deposits): While T-Bills are not traditional deposits, banks and post offices are required to deduct tax at source if you invest through them
• Section 54 & 54F (Capital Gains): Long-term capital gains on T-Bills held for more than 12 months attract preferential rates under Income Tax Act 2025
• Section 28(iv) (Income from Securities): The discount earned on T-Bills is taxable as income in the year of maturity
• Section 115(2)(xvi) (Income from Securities for Individuals): Special provisions for taxation of gains on securities
• Schedule III (Investment Schedules): T-Bill transactions must be disclosed in your ITR with full particulars including purchase date, face value, and cost

The old Income Tax Act 1961 provisions continue to apply where the 2025 Act does not specifically override. Sections like 194A remain operational for TDS purposes.

Tax Treatment of T-Bills:

The income earned from Treasury Bills is categorized as 'Income from Other Sources' under the Income Tax Act 2025. The key distinction is:

• If held for less than 12 months: Gain is taxed as short-term capital gain at your slab rate
• If held for 12 months or more: Gain qualifies as long-term capital gain (20% tax with indexation benefit, or flat 12.5% as per Section 112 amendments)
• TDS at Source: If purchased through authorized banks or brokers, 10% TDS is deducted on the discount earned (unless you submit a Form 15G/15H declaration)

What Does This Mean for You?

For Salaried Employees:

If you invest ₹1 lakh in the 91-day T-Bill at the current cut-off yield of 5.73% (YTM), your discount will be approximately ₹1,422. This ₹1,422 is taxable income. However, if your total income (salary + other sources) does not exceed the basic exemption limit of ₹3,00,000 for AY 2026-27 (individual below 60 years), you may claim a refund of TDS deducted.

Important: Even if TDS is deducted, you must report this income in your ITR. Failure to do so triggers scrutiny and penalty under Section 271(1)(c).

For Senior Citizens:

If you are 60 years or above, the basic exemption limit is ₹5,00,000. T-Bills income within this threshold is tax-free. Many senior citizens use 364-day T-Bills (maturity within one financial year) to earn tax-free income. This strategy is legally sound under the Income Tax Act 2025.

For NRIs (Non-Resident Indians):

NRI investments in T-Bills are subject to different rules. Income is taxable under Section 5 of the Income Tax Act 2025 if earned in India. However, NRIs can file Form 10F to claim exemption on foreign income. T-Bill income is Indian-source income, so it remains taxable unless you are covered by tax treaty provisions.

For Businesses & Companies:

Corporate investments in T-Bills qualify for exemption on dividends (Section 10(35)) if issued by the government. However, the discount earned is still taxable as business income at your applicable corporate rate (22% or 15% for newly incorporated companies).

GST Angle:

Treasury Bills are exempt from GST under the GST regime. No GST is charged on purchase or sale of T-Bills. This makes them an attractive investment vehicle compared to other financial products where GST may apply.

What Should You Do Now?

Step 1: Assess Your Current Holdings

Review all T-Bills purchased in the past 12 months. Identify those approaching maturity in the current financial year (FY 2026-27). Calculate the discount earned on each tenement.

Step 2: Collect Documentation

• Auction confirmation slip showing purchase price and face value
• Bank statement showing TDS deducted (if applicable)
• Maturity advice with actual amount received
• Broker's statement or RBI Retail Direct portal records

Step 3: Plan for TDS Refund

If you are a senior citizen or your total income is below the exemption limit, submit Form 15G during investment or immediately after TDS deduction. This prevents TDS deduction and speeds up your cash flow. Alternatively, claim refund in your ITR filed for AY 2026-27.

Step 4: Maintain Proper Records

Under Section 92 of the Income Tax Act 2025, you must maintain records for 6 years. Store all T-Bill confirmations, TDS certificates (Form 16A), and correspondence with your bank or broker.

Step 5: Disclose in ITR Form

When filing your ITR for AY 2026-27 (by 31 July 2026), disclose T-Bill income under Schedule OI (Other Income). Provide:

• Nature of investment (T-Bill, 91/182/364-day)
• Purchase date and price
• Maturity date and amount received
• TDS certificate number (if deducted)

Step 6: Consider Investment Strategy

Given the current yield curve (364-day at 6.49% YTM is highest), evaluate whether longer-tenure T-Bills align with your tax planning needs. If you are a high-net-worth individual with significant income, short-term T-Bills may result in higher tax outgo. Consider 12-month-plus holding period to benefit from long-term capital gains rates.

Key Takeaways

• T-Bill income is taxable: The discount earned between purchase price and maturity value is taxable income in the year of maturity under the Income Tax Act 2025
• TDS applies at 10%: Tax is deducted at source if purchased through authorized channels. Senior citizens and those below exemption limit can claim refund via Form 15G or ITR
• Long-term vs short-term rates matter: Holding T-Bills for 12+ months qualifies for long-term capital gains treatment (12.5% flat rate with indexation benefit), resulting in significant tax savings
• Documentation is critical: Maintain all investment confirmations and TDS certificates for 6 years. Non-disclosure in ITR triggers penalties of 10-50% of tax sought to be evaded
• October 2026 auction offers competitive yields: The 364-day bills at 6.49% YTM are most attractive for tax planning; consider this when building your FY 2026-27 investment portfolio

Bottom Line: Treasury Bills are a safe, government-backed investment, but they are not tax-free. Proper planning, timely TDS management, and accurate ITR reporting are essential to maximize your after-tax returns for Assessment Year 2026-27.

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