Which of the following is a feature of demonetisation?

All of the above

The correct answer is option 4- All of the above.

Demonetisation is the process of invalidating a particular currency or a denomination of currency as legal tender. This means that the currency notes or coins of a specific denomination are no longer accepted for transactions, and people are required to exchange or deposit them within a certain period. In India, for example, the government demonetised the ₹500 and ₹1,000 currency notes on November 8, 2016, as a measure to curb corruption, black money, counterfeit currency, and terrorism financing. People had to deposit or exchange these notes for new currency within a specified timeframe.

Features of demonetisation

1. Demonetisation is viewed as a tax administration measure. Cash holdings arising from declared income was readily deposited in banks and exchanged for new notes. But those with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.

2. Demonetisation is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted.

3. Demonetisation also led to tax administration channelizing savings into the formal financial system. Though, much of the cash that has been deposited in the banking system is bound to be withdrawn but some of the new deposits schemes offered by the banks will continue to provide a base loans, at lower interest rates.

4. Another feature of demonetisation is create a less-cash or cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance. Though there are arguments against this as digital transactions require use of cell phones for customers and PointofSale (PoS) machines for merchants, which will only work if there is internet connectivity. On the contrary, these disadvantages are counterbalanced by an understanding that it helps people into the formal economy, thereby increasing financial saving and reducing tax evasion.