|
Getting your Trinity Audio player ready...
|
Investment instruments offered by a government are often popular among investors due to the assurance of sovereign backing. Government securities are among those avenues in India. The central as well as state governments can issue securities of different types. The primary reason behind government securities is to collect funds to compensate for budgetary deficits and finance various development projects. While these tools indicate the debt obligation of a government, as in, it is taking a type of loan, the investors get access to a new investment market.
A basic categorization will show the availability of two types of government securities in India – short term securities, which are treasury bills and cash management bills, and long term securities, which are dated securities or treasury bonds. Each type of security has unique objectives and features. A thorough comparative discussion will allow investors to understand their perks and pick the most suitable option.
Join us as we discuss treasury bills and treasury bonds in length and draw evaluation-based conclusions to help guide you toward the best investment decisions!
Comparative Analysis Treasury Bills & Treasury Bonds
Treasury bills and bonds are offered by the central government of India. RBI is responsible for issuing the securities, which it does via auctions. Press releases and newspaper advertisements are published to inform investors about the issues. Investors can proceed to purchase and avail the investment benefits.
It is important to remember that the two types of securities have some similarities while having multiple differences. Below is a comparison based on all the important parameters investors study before investing in government securities or any other investment avenue.
Maturity Period
Government securities can be categorized into short term and long term. A basic definition will state that any securities issued with a maturity period of less than 1 year is a T-bill, and any security offered for a tenure of more than 1 year is called a T-bond. There are further classifications.
T-Bill Tenures
T-bills can have three types of tenures.
- 91 days
- 182 days
- 364 days
T-Bond Tenures
There are different types of bonds the government offers, and they mostly range between 5 and 40 years.
Interest (Coupon)
The interest or coupon payment is one of the most crucial differentiating factors between treasury bills and bonds.
Treasury bills zero coupon securities as they do not offer any interest or coupon payments. They are issued at a discounted price and the profit is generated on maturity as investors receive the original security price. For instance, take a treasury bill with a face value of INR 100. After the discount, it will be issued at INR 90, but the investor will be paid the face value of INR 100 after the maturity period is over.
On the other hand, treasury bonds come with a fixed interest rate. They generate interest at the same rate throughout the year and coupons are credited to the accounts of the investors at regular intervals (semi-annually or annually). There are bonds with floating interest rates, too. The rate of interest is reset at a pre-decided interval (for example, every six months), and a coupon is generated accordingly.
Returns
In general, long-term investments offer better growth potential than short-term channels. In the case of government securities, bonds offer returns as the capital stays locked in and offers regular returns for a long period of time.
On the other hand, treasury bills compensate with a discount but do not have that much scope to grow capital.
Minimum Investment Amount
Investors can start investing in government bills for as low as INR 10,000. Further increment must be in the multiples of INR 10,000. On the other hand, the minimum investment in T-bills starts at INR 25,000.
Purchase Method & Liquidity
RBI conducts auctions for the issuance of government securities. The table below shows the schedule.
| Type of Security | Day of Auction | Day of Settlement |
|---|---|---|
| 91-day T-bills | Friday (every week) | Following Saturday |
| 182-day T-bills | Wednesday (alternate week) of the non-reporting week | Following Thursday |
| 364-day T-bills | Wednesday (alternate week) of the reporting week | Following Thursday |
| Treasury bonds | Friday (every week) | Following Monday |
Government securities, both bills and bonds, can be traded in the secondary market, making them liquid.
Eligible Investors
Large institutional investors occupied the government securities market of India earlier. However, the Retail Direct Scheme brought a change by enabling retail investors to participate in the market. Under the scheme, retail investors can make an account and invest in government securities on the Retail Direct Portal. The access of retail investors is spread over primary auctions of securities as well as the secondary market trades.
This eligibility is applicable for both treasury bonds and bills, making it another factor of similarity.
Tax Treatment
Government securities are subject to taxation on the income earned and capital gains, if any. Note, when held for more than 3 years, government securities will generate long term capital gains (LTCG), and when held for less than 3 years, will be considered short term capital gains (STCG). LTCG is taxed at 10% without indexation or at 20% with indexation. STCG is taxed as per individual tax slab rates.
T-bills are zero coupon securities offered with a discounted purchase price and returns in the equivalent of the original face value. So, gains will be generated on maturity, and they will be subject to STCG tax.
Government bonds, on the other hand, can be subjected to both STCG and LTCG taxes based on when the appreciation occurs.
Market Volatility
If the interest rates rise in the market, the value of existing bonds falls. This inverse relationship becomes challenging for long term investments, as the longer the tenure, the more subjectable they will be to market volatility.
Since treasury bills are issued for a maturity period of less than a year, it is less influenced by market volatility than treasury bonds issued for up to 40 years.
Default Risk
The risk of default is lower than most investment instruments available in the market as both types of securities are issued by the government itself.
Start investing with just ₹10K & grow your wealth with fixed return opportunities.
Invest Now
Ideal Investor Profile
Here’s the best way to identify the suitability of investor profiles.
| Treasury Bills | If you want a confident channel to park your investment for a year or less, T-bills are one of the good bets. |
| Treasury Bonds | If you are looking for long term investment options with high security and consistent returns, treasury bonds are the most suitable options. |
Invest in Government Securities with GoldenPi
GoldenPi is the first ever Indian fintech company to bring bonds and debentures to retail investors. It is a comprehensive platform guiding investors through the entire investment process, that starts with providing information on all the latest issues of government security and ends with helping them invest seamlessly and crediting the purchased units. Investors will have access to all the details about their options and expert opinions whenever needed.
Visit GoldenPi today and invest in government securities in 3 simple steps, that include:
- Quickly completing the KYC
- Selecting a government security
- Making the payment
FAQs Treasury Bonds vs. Treasury Bills
1. What is the interest rate of government securities?
Treasury bills are zero coupon bonds, so no interest rate is applicable. For government bonds, the interest rate varies. The approximate average return on government bonds can be 7.5%. Whenever a new issue enters the market, its interest rate, along with other important details, will be mentioned. You can visit GoldenPi to stay updated on the latest interest rates.
2. How do I know about the new government security issuance?
RBI issues press releases and publishes advertisements in leading newspapers. You can keep an eye on its website. Another way to know about government security issuance will be via GoldenPi. It keeps its database updated at all times. Besides, it also has a feature to send notifications whenever a new bond is issued, if you opt for it.
3. Does TDS apply to treasury bills and bonds?
TDS, tax deducted at source, is not applicable for treasury bills and bonds. Treasury bills are subject to short term capital gain tax. On the other hand, tax is imposed on the interest and capital gains (short or long term, as applicable) of treasury bonds.
4. How to buy government securities in India?
You can buy government securities on GoldenPi without any hassle. The process here is quite straightforward enough for even newbie investors. You will first have to complete the digital KYC. Then, you can check out the securities and pick one that matches your investment goals. Finally, make the payment, and the units will be transferred to your Demat Account.
5. How long does it take to transfer the purchased units of government securities?
Settlements of government securities are done on T (transaction day) + 1 day basis. As you make the payment to purchase a security, the units you bought will be transferred to your Demat account the next day. Suppose the transaction happens on a Thursday, you will receive the units the following Friday.
