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Government's new directive that all the 500 and 1000 rupees notes that are currently in circulation will not be considered a legal tender effective midnight, the 8th November 2016 , has been widely regarded as a historic move to combat the circulation and curbing of Counterfeit currencies. 

Similar in appearance to legal tender notes, counterfeit notes cause a considerable loss on the exchequer.

Government has said that new security enhanced 500s and 2000s currency notes will be introduced from 10th November 2016. Government has also said that the existing notes can be exchanged  in banks and post offices till 31st December 2016 by showing valid proof of identity. Buses and train ticketing counters, petrol stations, hospitals, airports etc to accept existing currencies. Cash transactions to be limited upto Rs.10000 and Rs.20000 per day and week respectively.

India is a cash holding economy where the paperless transactions using debit cards, credit cards, e wallets etc are still to become prevalently used.  Experts indicate that paperless transactions account for less than 5-6℅ of all the transactions in India. In the budget speech 2015, The finance minister had expressed the government's intention to increase the paperless transactions in India. The move to withdraw 1000  rupees from circulation, may indirectly act as an impetus to go paperless.

After the Independent Disclosure Scheme for bringing out Black money ending 30th September 2016, this move has drawn considerable reception both from the experts and the common people. It is widely believed that hoarders mostly hold the stock in Rs.500 and Rs. 1000. Most black money transactions happen in real estate deals (mainly by keeping low the transaction value in the sale deed while the real transaction is far higher and in cash) and in jewellery shops (except for big jewellery shops not many jewellery shops  give proper bills). By drawing curtains on such currencies and introducing new security enhanced 500s and 2000s, there is a considerable hope for tracking the same. 

Impact on common people:

The most affected by this move is obviously the common people as this news would have meant all their cash savings of in 500s and 1000s is as good as worthless paper. Though the currency notes can be exchanged till December 2016 and March 2017 (special cases), the limit on such exchanges will cause much difficulty. It is widely anticipated that the Government takes necessary steps to alleviate the difficulties faced by the common people.

Being a banker, personally I feel that there's a negative and positive outcome from this move.

Negative outcome is that there will be an increase in opening of Benami accounts in order to extract the maximum benefit of the guidelines issued today. Of course, this can be mitigated by rigorous compliance of  KYC norms issued by RBI.

Positive outcome is that almost all customer, including NPA customers, may visit the banks in the coming days. Shrewd bankers may take this as an opportunity to recover bad loans and cut NPAs.

Whether the Government's bold move results into the intended outcomes of curbing black money and counterfeit notes need to be seen. Nevertheless, this is a landmark decision in the history of our country.

Sincere thanks to Economic times and DD news.

The author can also be reached at


Published by

K Srinivas, CMA CS
(Founder, Artha Consulting Services)
Category Income Tax   Report

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