How to calculate treasury bills returns and maximise gains

Treasury bills (T-bills) offer returns based on the difference between their face value and purchase price.

Treasury bills (T-bills) offer returns based on the difference between their face value and purchase price. T-bill returns are considered short-term capital gains and are taxed according to your income tax slab, so it’s important to factor in taxes when calculating the overall gain. This will help you maximize the returns from your T-bill investments.

But before jumping in, it’s important to understand how T-bill returns are calculated and how they’re taxed. Knowing this will help you maximize your gains and ensure that you're making the most out of your investment. Let's break down the process so you can invest in T-bills confidently.

What are treasury bills?

T-bills are issued with maturities of 91 days, 182 days, and 364 days, making them short-term instruments. They are issued at a discount and redeemed at face value, with the difference between the issue price and the face value being the return on your investment.

How treasury bills returns are calculated

T-bills are zero-coupon securities, meaning they don't pay interest. Instead, you purchase them at a discount to their face value, and upon maturity, you receive the full face value. The return or yield is the difference between the purchase price and the face value, calculated as:

Yield Formula:

Yield = (Face Value−Purchase Price / Purchase Price) × 365 / Holding Period (in Days) ​× 100

For example, if you buy a 91-day T-bill with a face value of ₹100 for ₹98, the return is ₹2, and you can calculate the yield using the formula.

How treasury bills are taxed

T-bills returns are not tax-free. The gains from T-bills are treated as short-term capital gains (STCG) and are added to your taxable income. The tax rate depends on the individual's tax slab, which means higher-income investors will pay more tax on their T-bill returns.

How to maximise gains from T-bills

Here are a few tips to ensure you get the most out of your T-bill investments:

• Choose the right tenure: Depending on your liquidity needs, choose a tenure that works for you, whether it's 91 days, 182 days, or 364 days.
• Monitor interest rates: T-bills are sensitive to interest rate changes. Keep an eye on market trends to invest when rates are favourable.
• Consider tax impact: Since T-bill returns are taxed, you need to factor this into your overall investment strategy to maximise post-tax returns.