The Prime Minister on Tuesday shocked the nation when he suddenly announced that existing Rs 500 and Rs 1000 notes will not be legal tender from midnight.
So what can you use it for?
For three days (till November 11) you can use Rs 500 and 1000 notes you have only at certain places. You can:
How do you get rid of the notes you have?
So there won't be any more notes above Rs 100?
So why has it been done?
To end corruption and black money.
How does it do that?
Black money (money that is undeclared to tax authorities) is primarily in cash and stored in the form of currency notes by various businesses, political parties and individuals.
Example: If you pay your landlord half your rent in cash and the rest in cheque, the landlord doesn't declare the cash income in his/her tax returns and only the amount given by cheque.
Small businesses often deal in cash. Many builders demand payment for houses partly in cash so that they don't have to declare it to tax authorities. Political parties accept a lot of their donations in cash so that they don't have to declare the source of income.
Bribes are paid in cash, often in large notes.
Most of these transactions since they involve large sums of money are often done using Rs 500 and Rs 1000 notes. By banning these notes, people who are holding onto old Rs 500 and Rs 1000 notes are forced to submit them back to banks and declare them as income.
What's the problem with black money?
Because it is undeclared it can be used for any purpose. Estimates say about 20 percent of the Indian economy is supposed to be dealing in undeclared cash transactions.
This money has been used to fund bribery and to even to fund terrorism.
Black money can also consist of many fake notes, which is allegedly printed in Pakistan. Because it is not declared to authorities, it can be widely traded and keeps such fake notes in circulation.
Authorities say that the amount of fake notes in the banking system is very high due to the presence of black money. An RBI official said that the amount of black money circulated has grown greatly over the last 5 years.
Justice MB Shah from the Special Investigation Team that probed the issue of black money said that the difficulty will be only for people who have large sums of unaccounted money.
"They will find it difficult to make it legal," he told CNN-News18.
"The banking system will remain unaffected. The RBI appears to be prepared for it," he said.
"There will be short term difficulties for people," he said, adding, "Only those with unaccounted money would suffer and they must suffer."
Does this bring back black money from foreign back accounts?
This does no affect money stashed away in foreign accounts in anyway. The government had announced an amnesty scheme for those who had money in such bank accounts and will proceed against them separately.