Treasury Bills Investment & Income Tax 2026: Taxation Guide

What Happened?

The Government of India conducted a Treasury Bills auction in September 2026, offering three tenors: 91-day, 182-day, and 364-day bills. The auction was oversubscribed across all categories, with competitive and non-competitive bids received. The 91-day TBills attracted ₹22,188.15 crore in competitive bids against a notified amount of ₹9,000 crore, while longer-tenure bills also saw strong investor participation. The weighted average yields ranged from 5.37% (91-day) to 6.07% (364-day), reflecting current market interest rates.

Background & Legal Context

Treasury Bills are short-term debt instruments issued by the Government of India through the Reserve Bank of India. They are among the safest investment options available to individuals, corporates, and other entities in India. From a taxation perspective, TBill investments fall under the ambit of income from other sources and are governed by the Income Tax Act 2025.

Key Tax Provisions Applicable to Treasury Bills:

• Nature of Income: Income earned from Treasury Bills (interest/discount) is classified as "income from other sources" under Section 56 of the Income Tax Act 2025. The old Income Tax Act 1961 also had similar provisions that continue to apply during the transition period.
• Computation of Income: The difference between the face value of the TBill and the purchase price represents the interest/discount income. For example, if you purchase a 91-day TBill at ₹98.67 and it matures at ₹100, the gain of ₹1.33 per ₹100 is your taxable income.
• Tax Deducted at Source (TDS): Under Section 193 of the Income Tax Act 2025, TDS at the rate of 10% is mandatory on interest income from government securities, including Treasury Bills. However, if your total income is below the exemption limit (₹2.5 lakh for individuals below 60 years for AY 2025-26 and AY 2026-27), you may claim a refund by filing an Income Tax Return (ITR).
• Exemption under Section 10(15)(iv): Interest earned on Treasury Bills by certain categories (like senior citizens under specific conditions or certain institutional investors) may qualify for exemption, though individual retail investors typically don't benefit from this.
• Indexation Benefit: Unlike other securities, Treasury Bills are not eligible for indexation benefit under Section 48 of the Income Tax Act 2025, as they are short-term instruments and the income is already taxed as interest at ordinary rates.

What Does This Mean for You?

If you are considering investing in Treasury Bills through this or future auctions, here are the tax implications you must understand:

For Individual Investors:

• Interest Income Taxation: The yield you earn (e.g., 5.37% on 91-day TBills) is added to your total income and taxed according to your applicable income tax slab. For AY 2026-27, if your total income falls in the 20% bracket, your effective return after tax reduces significantly.
• TDS Impact: Banks and the RBI will deduct TDS at 10% on the interest earned. If you have multiple sources of income and fall in a higher tax bracket, you may have additional tax liability beyond TDS. Conversely, if you're below the exemption limit, you can recover the TDS through ITR filing.
• No Capital Gains Tax: Unlike equity or mutual fund investments, there is no separate capital gains taxation on TBills. The entire income is treated as interest income.
• Deduction of Brokerage/Fees: Any brokerage or transaction fees paid for purchasing TBills are deductible from the interest income under Section 57 of the Income Tax Act 2025 (expenses incurred for earning income from other sources).

For Corporate Investors:

• Interest earned by companies on Treasury Bills is taxed as ordinary business income under Section 28 of the Income Tax Act 2025.
• The interest income is added to total corporate profits and taxed at the applicable corporate tax rate (currently 20%-22% depending on turnover).
• TDS is still deducted at source, but the company receives credit against its total tax liability through ITR filing.
• For small companies with turnover up to ₹2 crore, the concessional corporate tax rate of 15% may apply if certain conditions are met.

For Senior Citizens & HUFs:

• Senior citizens (age 60+) have a higher income exemption limit of ₹3 lakh for AY 2025-26 and AY 2026-27, so TDS recovery through ITR is easier.
• Hindu Undivided Families (HUFs) are taxed separately and have their own exemption limits. TDS deducted on HUF income can be recovered through HUF ITR.

What Should You Do Now?

Step 1: Assess Your Total Income
Calculate your expected total income for AY 2026-27 including TBill interest. This determines whether you'll owe additional tax beyond TDS or can claim a refund.

Step 2: Plan for TDS Outgo
If you invest ₹10 lakh in 91-day TBills at 5.37% yield, your annual interest is approximately ₹5,370. TDS of ₹537 (10%) will be deducted. Ensure you have liquidity for this.

Step 3: Maintain Investment Records
Keep all TBill purchase confirmations, allotment letters, and redemption statements. These are required for ITR filing and TDS claim. The RBI provides detailed documentation through the Retail Direct portal.

Step 4: File ITR on Time
Report all TBill income in Schedule "OS" (Other Sources) of your ITR. Filing ITR by the due date (July 31 for most taxpayers for AY 2026-27) ensures timely TDS refund claims.

Step 5: Claim Form 26AS Benefits
Download your Form 26AS from the income tax portal to verify TDS credits before filing ITR. This reconciliation is critical for avoiding disputes with tax authorities.

Step 6: Explore Alternate Investments
Compare TBill returns after-tax with other government securities (like GSecs with longer maturity), fixed deposits offering TDS-free returns, or tax-free bonds if you're in higher tax brackets.

Key Takeaways

• Treasury Bills income is taxed as interest under Section 56 of Income Tax Act 2025, not as capital gains. This means every rupee of gain is added to ordinary income and taxed at your slab rate.
• Mandatory TDS of 10% is deducted on TBill interest by RBI/banks. However, you can claim refund if your total income is below exemption limits—file ITR to recover excess TDS.
• Senior citizens benefit from higher exemption limits (₹3 lakh for AY 2026-27), making TBill investments more tax-efficient for retirees. Couple this with spousal investments to minimize tax outgo.
• Unlike equity investments, TBills offer no indexation benefit and no long-term capital gains treatment. Plan your portfolio by comparing post-tax returns with other securities before committing large sums.
• Maintain complete documentation of TBill transactions, TDS certificates, and reconcile with Form 26AS. This prevents IT notices and speeds up refund processing for AY 2025-26 and AY 2026-27 onwards.

Final Note: While Treasury Bills are the safest instruments, their post-tax returns may not beat inflation if you're in a high tax bracket. Consult a CA before deciding allocation, especially if you have income from multiple sources.

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