What is legal tender currency? How the concept was involved under demonetisation?

The RBI in an FAQ informed the public that Rs 500 and Rs 1000 notes are no more legal tender currencies from Novermber 8, 2016 onwards. This notice technically and officially completed demonetisation or withdrawing them from circulation. Here, the word legal tender becomes very important to understand the validity of currency.

What is legal tender?

Legal tender is legal status given to an instrument like currency note that it can be used as medium of payment. For example, the Rs 2000 note involves a legal tender assured by the RBI for settling payments to that value.

Cheques or instruments like commercial bills can’t be used as legal tender money. Similarly, a virtual currency like Bitcoin is different from bank notes mainly because the Bitcoin is not a legal tender money.

When the government withdraws legal tender status to a currency denomination, it cannot be used for settling transactions.

What the Gazette says on withdrawing of legal tender status to Rs 500 and Rs 1000 notes?

The withdrawal of legal tender status was announced through an extraordinary gazette published on November 8, 2016. The Gazette says that the RBI Director Board made such a recommendation.

“Whereas, the Central Board of Directors of the Reserve Bank of India (hereinafter referred to as the Board) has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender”

The gazette notification specified Article 26 of RBI Act 1935 while doing it.

 “…in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934, the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016…”

Section 26(2) of the RBI Act says that on recommendation of the Central Board of the RBI, the Government may, through notification in the Gazette of India, declare that any series of bank notes of any denomination shall cease to be legal tender.

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