Demonetisation was a new step taken by the Government of India on 8^th November 2016. It was introduced to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy. Old currency notes of Rs.500 and Rs. 1000 were no longer legal tender.

New currency notes in denomination of Rs.500 and Rs.2000 were introduced. The public were advised to deposit old currency notes in their bank account till 31^st of March 2017 without any declaration and after 31^st March 2017 with the RBI with declaration.

In order to avoid a complete Breakdown and scarcity of Cash, government allowed exchange of Rs.4000 old currency notes with new currency restricting to a person per day. Further, till 12^th December 2016, old currency notes were acceptable as legal tender at petrol pumps, government hospitals and for payment of government dues like taxes, power bills, etc.

This initiative had both appreciation and criticism. There were long queues outside banks and ATM centres. There was acute shortage of currency notes and had adverse effect on economic activities. But now, normalcy has returned.

The demonetization also has positive effects. It improved tax compliance as a large number of people were bought in the tax ambit. The savings of individual were channelized into the formal financial system. As a result, banks have more resources at their disposal which can be used to provide more loans at low rate of interest.

Demonetisation helps in curbing black money, reducing tax evasion and corruption will decrease. It also helps in tax administration in another way, by shifting transaction out of the cash economy into the formal payment system. Nowadays, households and “firms have started to shift from cash payment to electronic payments.