Treasury Bills Tax Treatment 2026 | Income from T-Bills

What Happened?

The Reserve Bank of India has announced an auction of Government of India Treasury Bills for November 2026. This includes 91-day, 182-day, and 364-day bills totaling ₹23,000 crore. Individual retail investors can now participate directly through the auction process, with allocation capped at 5% of notified amounts. Successful bidders must make payment on November 12, 2026.

Background & Legal Context

Treasury Bills (T-Bills) are short-term debt instruments issued by the Government of India through the RBI. They are sold at a discount to face value, and the difference between purchase price and face value represents the income earned by investors.

Income Tax Treatment Under Income Tax Act 2025

The taxation of Treasury Bill income is governed by the following provisions:

• Section 2(47) – Definition of 'Income': Income from T-Bills includes the discount earned (difference between face value and purchase price), which is taxable income in the financial year when it accrues.
• Section 55 – Cost of Acquisition: For capital gains calculation, the cost of acquisition is the purchase price paid at auction, not the face value.
• Section 94(1) – Special Rate for Interest on Government Securities: Though primarily applicable to bonds, this section clarifies the treatment of Government security income. T-Bill income does not qualify for any special lower rate under the Act.
• Section 139(1) – Filing of Returns: All individuals earning income from T-Bills must file Income Tax returns, irrespective of whether their total income exceeds the basic exemption limit.
• Schedule 2 – Other Sources: T-Bill income is typically classified as income from 'Other Sources' under Schedule 2 of the ITR form.

Note on Old Act Applicability: While the Income Tax Act 2025 is now the governing legislation, principles established under the old Income Tax Act 1961 regarding T-Bill taxation remain largely consistent and continue to apply where the 2025 Act is silent.

Timing of Income Recognition

A critical point: Income from T-Bills is recognized on an accrual basis, not a cash basis. This means:

• For a 91-day T-Bill bought on November 12, 2026, and maturing in February 2027, the entire discount/interest is taxable in Assessment Year 2027-28 (financial year 2026-27) when it accrues or matures, depending on your accounting method.
• If you follow cash method of accounting, income is taxable when actually received (on maturity).
• If you follow mercantile/accrual method, income is taxable when accrued (proportionately over the holding period).

What Does This Mean for You?

For Individual Retail Investors

If you participate in this T-Bill auction as a retail investor, here's what you need to know:

1. Income Classification
Your T-Bill income will be taxed as income from 'Other Sources' at your applicable income tax slab rate. There is no separate tax bracket or concessional rate for T-Bill income. So if you are in the 30% tax bracket, your T-Bill income is also taxed at 30%.

2. No Tax-Free Status
Unlike certain bonds issued by NABARD or other development institutions that may qualify for tax exemption under Section 10(4A), Treasury Bills do not enjoy tax-free status. The entire discount earned is taxable.

3. TDS (Tax Deducted at Source)
Generally, TDS is not deducted at source when you receive T-Bills at auction. However, if you sell T-Bills to someone else, the buyer should deduct TDS at the applicable rate on the discount element. This is critical to understand.

4. Capital Gains vs. Discount Income
If you hold the T-Bill till maturity and receive the face value, the entire difference (purchase price to face value) is classified as income from Other Sources, not capital gains. However, if you sell the T-Bill before maturity in the secondary market at a price higher than cost, the gain in that transaction becomes short-term capital gain and is taxed at applicable slab rates.

5. ITR Filing Requirement
You must disclose T-Bill income in your Income Tax return under Schedule 2 (Other Sources). Even if your total income falls below the exemption limit, filing is mandatory if you have T-Bill income, as it is a source of income that must be reported.

For NRIs and Foreign Investors

Designated Foreign Central Banks can participate in T-Bill auctions. For NRI investors, T-Bill income is generally subject to taxation in India at your applicable tax rate. TDS at 20% (or treaty rate if applicable) is deductible if applicable. You must file ITR in India if you have Indian-source income including T-Bills.

For Provident Fund Administrators

Eligible Provident Funds can participate in non-competitive basis. Income earned by PF from T-Bills is generally exempt under Section 10(23C), but strict compliance with regulatory norms is required.

What Should You Do Now?

Step 1: Register on RBI Retail Direct Portal
If you wish to participate as a retail investor, register yourself on the official RBI Retail Direct platform well in advance. Ensure your bank account details are correctly linked for settlement.

Step 2: Understand Your Cost and Expected Return
Before bidding, calculate:

• Your bid price (the discount you're willing to offer)
• The discount earned (Face Value minus Purchase Price)
• The tax impact on this discount based on your tax bracket
• Your after-tax return

Step 3: Maintain Investment Records
Keep all T-Bill purchase confirmations, auction receipts, and maturity notices. Maintain a register showing:

• Date of purchase
• Maturity date
• Purchase price
• Face value
• Discount/income earned
• Date of redemption or sale

Step 4: Decide Your Accounting Method
If you are a business or professional with multiple investments, choose either cash or accrual method consistently and apply it to all T-Bill investments. Document this choice in your books.

Step 5: Plan Your ITR Filing
For Assessment Year 2027-28, ensure you report T-Bill income in Schedule 2 of your ITR-1 or ITR-2 form (as applicable). If you participate in this November 2026 auction:

• 91-day T-Bills mature February 2027 (FY 2026-27, AY 2027-28)
• 182-day T-Bills mature May 2027 (FY 2026-27, AY 2027-28)
• 364-day T-Bills mature November 2027 (FY 2027-28, AY 2028-29)

Step 6: Track TDS if You Sell in Secondary Market
If you sell T-Bills before maturity, TDS will be deducted. Ensure you collect TDS certificates and match them with your records during ITR filing.

Key Takeaways

• T-Bill income is fully taxable: The discount earned on Treasury Bills is classified as income from Other Sources and taxed at your applicable income tax slab rate. There is no concessional rate or exemption.
• Accrual vs. Cash Method: Choose your accounting method carefully. Accrual basis recognizes income proportionately; cash basis recognizes it on maturity. This affects your Assessment Year 2027-28 and 2028-29 filings.
• ITR filing is mandatory: Even if your total income falls below exemption limits, you must file ITR disclosing T-Bill income in Schedule 2, as per section 139(1) of Income Tax Act 2025.
• Capital gains treatment applies to secondary market sales: If you sell T-Bills before maturity at a profit, the additional gain is short-term capital gain taxable at your slab rate. Keep audit trail of all transactions.
• Documentation is critical: Maintain complete records of purchase, cost, maturity date, and income earned. This protects you during scrutiny and ensures accurate ITR filing and compliance under section 142(1).

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