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RBI Masterstroke Against Black Money: Pre-2005 Currency Notes Expire From March 31, 2014

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While the news of scribbled currency being banned from Jan 2014, which was widely being spoken about was simply a rumour, this one if not.

RBI has officially announced (read update as well) in a press release yesterday that after March 31, 2014, they will completely withdraw from circulation all banknotes of all denominations issued prior to 2005. From April 1, 2014, everyone will be required to approach banks for exchanging pre-2005 notes. Banks will provide exchange facility for these notes for a fixed duration of time (the last date will be announced at later date).

How To Identify Pre-2005 Currency Notes?

All Bank notes that have been printed after 2005, have year of printing on them, whereas, the once that were printed prior to 2005 do not carry the printed year. So, general public can easily identify these notes. See exampled below of Pre and post 2005 bank notes.

Post 2005 Bank Note (With Year of Printing)

Bank Notes 2005

Pre 2005 Bank Note (Without Year of Printing)

prior 2005 Bank Note

So, the notes that do not have year printed on them (Like Rs. 500 note above) will not be accepted after March 31st, 2014.

How Will It Help Weed Out Black Money?

First off, not all the black money will go out of the system, but surely a sizeable chunk will. As per RBI data, as of December 2005, there were 3,785 crore pieces of banknotes in circulation, worth about Rs 4 lakh crore. Even if you consider that 10% of that amount to be black (in my view it is much more), nearly 40,000 crore of black money will suddenly have no value at all after March 31st, 2014.

While black money hoarders may be tilted to use up their black money buy Gold or real estate or such assets, it will still be very difficult. Because with this rule coming into effect, the sellers of these assets are not going to accept pre-2005 black money.

What about people who have pre-2005 White money?

They do not have to worry. First off, very few will have large quantity of white money in cash, and the ones who do have can get it exchanged from banks even after March 31st 2014.

The Reserve Bank has also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers.

From July 01, 2014, however,  to exchange more than 10 pieces of 500 and 1000 rupee notes, non-customers will have to furnish proof of identity and residence to the bank branch in which she/he wants to exchange the notes.

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