How to buy back T-Bill at a discount

The Reserve Bank of India last month auctioned three T-bills at higher cut-off yields, dropping some hints on the hardening of short-term interest rates. The government raised 10,000 crore through this auction. They are short-term borrowing tools for the government. They are promissory notes with guaranteed repayment at a later date. They have a maximum tenure of 364 days and are issued in three maturities - 91 days, 182 days and 364 days.

The original value is given at a discount to their original value and the buyer gets the original value upon maturity. Let's explain it through an example.

The government will sell 100 T-Bill at a discounted price of Rs 95 in the money market, but it will buy back the T-Bill at its original price of Rs 100 after the maturity of say 91 days.

The buyer who bought the T-bill for Rs 95 will make a profit of Rs 5 when the government buys back the T-Bill.

T-Bills don't generate any interest and are zero-coupon securities. They are a safe investment instrument and a liability to the government. They are backed by the highest authority in the country and have to be paid back even in times of a financial crisis.

Long term treasury bonds have been criticised for their low returns. While slamming the low yield in his country, the famous US investor and fund manager William Gross had last year termed it an investment garbage. He had also questioned if the stock markets would follow suit.

Short-term capital gains realised by T-Bills are subject to the STCG tax at rates applicable as per the income tax slab of the investor. Retail investors aren't required to pay TDS upon redemption of T-Bills.