When a currency note or notes of particular demonetisation ceases to be a legal tender, it is termed as demonetisation. Under demonetisation, the status of legal tender currency is withdrawn by the government. Demonetised currency is no longer accepted as a medium of exchange. The old currency is replaced by new currency
Demonetisation of currency in India was done to achieve the following objectives:
1. Elimination of Black Money: Black money refers to unaccounted money. This kind of money is accumulated by people by not paying the due amount of tax and by indulging in illegal activities. The aim of the government was to eliminate black money from the economy.
2. To Curb Corruption Illegal transactions (e.g. bribery, smuggling etc.) are commonly carried out through high value notes. The government wanted to eliminate the root cause of corruption through demonetisation
3. To Eliminate Counterfeit Currency: Another objective of demonetisation was to eliminate counterfeit currency. There was a huge amount of fake currency in circulation. This counterfeit currency was causing inflationary pressure in the economy.
4. To Check Terror Funding Demonetisation was also aimed at elimination of terror funding. High denomination notes were being used for terror activities. Terror activities would automatically come to an end in the absence of finance.