Section 26 and Section 26A of the RBI Act, 1934: Legal Tender Character of Banknotes

Sections 26 and 26A of the Reserve Bank of India Act, 1934 explain when an RBI banknote is legal tender and when particular banknotes cease to have that status. These provisions distinguish the legal validity of a note from its availability in everyday circulation.

Key distinction: Withdrawal from circulation does not automatically mean loss of legal tender status. The RBI has expressly stated that Rs 2000 banknotes continue to be legal tender despite their withdrawal from circulation.

Meaning of legal tender

Legal tender is money recognised by law for payment or discharge of monetary obligations, subject to applicable statutory provisions. Under Section 26(1), RBI banknotes ordinarily carry legal tender status throughout India for their face value and are guaranteed by the Central Government. The provision is subject to the power in Section 26(2) to withdraw that status for a specified series.

Section 26: Legal tender character of notes

Section 26(1)

Subject to sub-section (2), every banknote is legal tender at any place in India in payment or on account for the amount expressed on it, and is guaranteed by the Central Government.

Section 26(2)

On the recommendation of the RBI Central Board, the Central Government may notify in the Gazette of India that any series of banknotes of any denomination shall cease to be legal tender from the specified date, except at the RBI offices or agencies and to the extent specified in that notification.

Explanation: Section 26(1) states the general rule. Section 26(2) sets out a specific legal mechanism for withdrawing the legal tender character of a series of notes. A notification must identify the affected notes, operative date and any permitted exceptions. It is therefore important to check the actual notification rather than assume that all notes of a denomination have been invalidated.

Section 26A: Certain banknotes to cease to be legal tender

Notwithstanding anything contained in Section 26, no banknote of the denominational value of five hundred rupees, one thousand rupees or ten thousand rupees issued before 13 January 1946 shall be legal tender in payment or on account for its expressed amount.

Explanation: The words notwithstanding anything contained in Section 26 give this provision overriding effect for the specific pre-13 January 1946 notes. Section 26A is a historical statutory exclusion. It does not mean that every modern Rs 500 note is invalid, nor does it itself govern the 2016 withdrawal of the old Rs 500 and Rs 1000 series.

Application to demonetisation and currency withdrawal

Old Rs 500 and Rs 1000 notes in 2016

The specified Rs 500 and Rs 1000 Mahatma Gandhi Series banknotes ceased to be legal tender with effect from midnight on 8 November 2016. The subsequent Specified Bank Notes (Cessation of Liabilities) Act, 2017 separately addresses liabilities and restrictions concerning specified banknotes, subject to statutory exceptions. The new Rs 500 Mahatma Gandhi (New) Series is distinct from the old withdrawn Rs 500 notes.

Rs 2000 banknotes withdrawn from circulation in 2023

On 19 May 2023, the RBI announced the withdrawal of Rs 2000 denomination banknotes from circulation as part of its Clean Note Policy. However, it expressly retained their legal tender status. Ordinary bank-branch deposit and exchange facilities ended on 7 October 2023; the RBI has provided facilities through its 19 Issue Offices, including eligible remittance by India Post for credit to bank accounts, subject to applicable conditions and subsequent RBI instructions.

Thus, a banknote can remain legal tender even when the RBI stops issuing it or seeks its return from circulation.

Difference between Sections 26 and 26A

Section 26(1): General legal tender status and Central Government guarantee for RBI banknotes.
Section 26(2): Government power, on the RBI Central Board's recommendation, to end legal tender status of a notified series.
Section 26A: Specific statutory exclusion of Rs 500, Rs 1000 and Rs 10000 banknotes issued before 13 January 1946.

Frequently asked questions

Are all Rs 500 banknotes invalid?

No. The withdrawal of the specified older Rs 500 series in 2016 does not invalidate the subsequently introduced Rs 500 Mahatma Gandhi (New) Series.

Are Rs 2000 banknotes illegal?

No. The RBI distinguishes withdrawal from circulation from cessation of legal tender status. Rs 2000 notes continue to be legal tender under the RBI's published instructions.

Can a banknote lose legal tender status without ceasing to physically exist?

Yes. Legal tender status is determined by law and valid government notifications, not by whether a physical note still exists.

Official legal text and RBI guidance

Updated: 4 October 2026. For operational exchange procedures, consult the latest RBI directions.