Question

Which enactment deals with withdrawal of currency notes from being legal tender?
1. Prevention of Money Laundering Act
2. Reserve Bank of India Act
3. Banking Regulation Act
4. Indian Paper Currency Order

Answer 1

Correct Answer - Option 2 : Reserve Bank of India Act

The correct answer is the Reserve Bank of India Act.

• The enactment deals with withdrawal of currency notes from being legal tender by the Reserve Bank of India Act.
  • Legal tender' is the valid money used for payment of the debt and also recognized by the law of the land. It should be accepted for the discharge of debt.
  • The central bank has the sole right to issue banknotes as empowered by the RBI Act of 1934. The provision states that every banknote shall be legal tender at any place in India in payment for the amount expressed therein.
  • Legal tender can be either limited or unlimited. In India, while the coins are limited legal tender, the currency notes are unlimited legal tender.
  • Accordingly, 50 paise coins can be used as the legal tender for dues up to Rs 10.

• Importance of Legal Tender is:
  • It is essential to know the consequences of canceling the legal tender status of a particular currency note or coin.
  • It is because paper money gets its value from the government's recognition of it. Unlike gold which still holds value as per tradition despite a government declaring it worthless, currency notes function differently. 
  • A piece of paper can get its value only if the government or the central bank declares it to be legal tender.
  • Accordingly, the withdrawal of the legal tender nature of a currency can impact the personal finances of the citizens too.

• Present Legal Tender in India are:
  • Currently, the currency notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50, Rs.100, Rs.500, and Rs.2,000 in the Mahatma Gandhi series are currently in circulation.
  • Further, the coins of 50 paise, Rs 1, Rs 2, Rs 5, and Rs 10 denominations of various sizes, themes, and designs are in circulation.