In a WordPress Theme, template tags are used in template files to generate specific programming instructions. They are used to display generated content and information on a WordPress site. Template tags are short programming words, also known as functions, that tap into the WordPress core for instructions. For example, the HTML title tag of a WordPress site may hold the bloginfo() template tag that requests the site title, site tagline, and other site information set by the template tag parameters. Using this in the title HTML tag allows the Theme to be used on multiple sites and the information displayed will change easily with each site.

Other template tags are more sophisticated, generating post content, queries, and site data.

Reference http://codex.wordpress.org/Glossary