Treasury Bills are often marketed as “risk-free” investments. And in one important sense, they are — the Government of India has never defaulted on a T-Bill payment, and never will as long as the government exists. But “no default risk” is not the same as “no risk at all.”
T-Bills carry several real risks that every investor should understand before committing money. This guide covers each risk honestly, explains its practical impact, and tells you when it matters and when it does not.
The short answer — are T-Bills risky?
T-Bills have zero credit risk (default risk) but carry five other types of risk that are real and worth understanding:
- Interest rate risk
- Inflation risk (purchasing power risk)
- Liquidity risk
- Tax risk
- Reinvestment risk
Whether these risks matter to you depends entirely on how and why you are investing in T-Bills.
Risk 1 — Interest rate risk
When interest rates rise after you buy a T-Bill, the market price of your existing T-Bill falls. This is because new T-Bills offer higher yields — making your lower-yield T-Bill less attractive to buyers. If you sell before maturity, you may receive less than the face value.
Real example: You buy a 364-day T-Bill at ₹93,500 (face value ₹1,00,000, yield ~7%). Three months later, the RBI raises rates and new T-Bills yield 7.5%. If you sell your T-Bill now on NDS-OM, you will receive less than you paid because your T-Bill’s yield is now below market.
Risk 2 — Inflation risk (purchasing power risk)
T-Bill yields are fixed at the time of purchase. If inflation rises above your T-Bill yield, your real return (inflation-adjusted return) is negative. Your money grows nominally but buys less in real terms.
Real example: You buy a 91-day T-Bill yielding 6.5%. During the same period, India’s CPI inflation rises to 7.2%. Your real return is 6.5% − 7.2% = −0.7%. You earned money nominally but lost purchasing power.
Risk 3 — Liquidity risk
Although T-Bills can be sold on the NDS-OM secondary market, liquidity for retail investors is limited. The bid-ask spread (difference between buying and selling price) can be wide for small lot sizes, meaning you may receive a worse price than expected. Unlike liquid mutual funds which redeem at NAV in T+1 day, T-Bills do not have a guaranteed exit price before maturity.
Real example: You invest ₹5 lakh in a 364-day T-Bill. After 6 months you need the money urgently. You can sell on NDS-OM, but you may only find buyers at a price below the theoretical fair value — especially for smaller amounts.
Risk 4 — Tax risk
The discount earned on T-Bills is taxed as income at your applicable slab rate — not at a concessional capital gains rate. For high-income investors, this significantly erodes real returns.
Impact by tax bracket:
| Tax bracket | T-Bill gross yield | Tax deducted | Post-tax yield |
|---|---|---|---|
| 0% (no tax) | 6.70% | 0% | 6.70% |
| 5% slab | 6.70% | 0.34% | 6.37% |
| 20% slab | 6.70% | 1.34% | 5.36% |
| 30% slab | 6.70% | 2.01% | 4.69% |
Risk 5 — Reinvestment risk
T-Bills mature in 91, 182, or 364 days. When your T-Bill matures, you need to reinvest at whatever yield is available at that time. If interest rates have fallen since you first invested, your new T-Bill will offer a lower yield — your income stream is not locked in long-term.
Real example: You invest in a 91-day T-Bill at 7% yield. Ninety-one days later it matures. You reinvest but now the auction yield has dropped to 6.2%. You earn less going forward despite the same strategy.
The one risk T-Bills do NOT have — credit/default risk
This is worth stating clearly: T-Bills carry zero credit risk. The Government of India has never defaulted on a T-Bill or any sovereign domestic debt instrument. Unlike corporate bonds, NCDs, or even AAA-rated debt mutual funds, there is no scenario in which the government fails to repay your T-Bill at maturity — as long as the government exists.
This is why T-Bills are called “risk-free” in academic finance — the term specifically refers to credit/default risk, not the other risks described above.
T-Bill risks — complete summary table
| Risk type | Severity | Who it affects | How to avoid |
|---|---|---|---|
| Credit / default risk | None | Nobody — sovereign guarantee | N/A — does not exist |
| Interest rate risk | Low–Medium | Investors who sell before maturity | Hold to maturity |
| Inflation risk | Medium | All investors in high-inflation periods | Use T-Bills for short-term only |
| Liquidity risk | Low–Medium | Investors needing early exit | Don’t invest money you may need early |
| Tax risk | High (30% bracket) | High-income investors | Compare alternatives like PPF, tax-free bonds |
| Reinvestment risk | Low–Medium | Investors rolling over T-Bills | Use SDLs/G-Secs for long-term fixed yield |
Should you still invest in T-Bills despite these risks?
For most conservative investors, the answer is yes — with the right expectations:
- Invest only money you will not need before maturity — this eliminates interest rate and liquidity risk entirely
- Use T-Bills for amounts above ₹5 lakh — where their sovereign safety advantage over bank FDs is most meaningful
- Pair T-Bills with SDLs — T-Bills for short-term (91–364 days), SDLs for long-term (5–40 years), eliminating reinvestment risk for the long portion
- Consider your tax bracket — if you are in the 30% slab, run the post-tax numbers before committing
T-Bills vs alternatives — risk comparison
| Instrument | Credit risk | Interest rate risk | Inflation risk | Tax risk |
|---|---|---|---|---|
| T-Bills | None | Low (hold to maturity) | Medium | High (slab rate) |
| SDL bonds | Near zero | Medium (long duration) | Low (long lock-in) | High (slab rate) |
| Bank FD | Low (DICGC ₹5L) | None (fixed rate) | Medium | High (slab rate) |
| Liquid MF | Low–Medium | Very low | Medium | High (slab rate) |
| Corporate bonds | Medium–High | Medium | Medium | High (slab rate) |
| Equity MF | Low (diversified) | None | Low (beats inflation) | Low (LTCG 10%) |
The bottom line
Treasury Bills are as close to risk-free as any investment gets in India. The one risk they truly eliminate — government default — is the most catastrophic risk in fixed income. The risks they do carry — inflation, tax, reinvestment, and limited liquidity — are manageable with proper portfolio construction.
Understand the risks, plan around them, and T-Bills remain one of the most reliable short-term instruments available to Indian investors.
For a complete guide to T-Bill investing, read: Treasury Bills India — Complete Guide. For a balanced view of pros and cons: Advantages and Disadvantages of Treasury Bills. For longer-term alternatives: State Development Loans (SDL).