Union Cabinet on Wednesday approves an ordinance in this regard.

The Union Cabinet on Wednesday approved the promulgation of an ordinance to help extinguish the Reserve Bank of India’s liability towards currency notes of ₹500 and ₹1,000, which were withdrawn on November 8.

The ordinance also includes a provision to penalise holders of such notes above a certain threshold after March 31, 2017, though a senior official said the government was still working out the modalities. Some media reports suggested that these could include hefty monetary fines as well as a four-year prison sentence.

The government had set December 30, 2016 as the deadline for depositing into banks these currency notes. After that date, those still holding such notes would be able to deposit them at the RBI up to March 31, along with an explanation as to why they failed to deposit them earlier. A notification will be issued soon on the conditions for such deposits with the central bank.

“Under Section 26 of the RBI Act, there is an obligation of payment of legal tender by the central bank,” the official told The Hindu. “Now, old ₹500 and ₹1,000 have ceased to be legal tender but the legal obligation on RBI also needs to be relieved. This ordinance does that.”

The official said a person holding a few notes of the demonetised currency will not face penal action “but if someone has ₹50,000 or ₹1 lakh in old currency, she or he may be questioned.”

“The government wants to discourage any illegal use of the notes post the completion of the demonetisation process and to make sure that all notes that were issued by the RBI are accounted for finally,” D.K. Srivastava, Chief Policy Adviser, EY India told The Hindu.

“In order to take advantage of the fiscal windfall due to demonetisation, accounting must be done of how much has come in and how much has not,” Mr. Srivastava said.

“By removing the liabilities and also making accounting of the notes clearer, the ordinance paves the way for the RBI to decide how much of a special dividend to the government it will give after March 31,” Mr. Srivastava added. The ordinance will need to be approved by President Pranab Mukherjee, before it comes into force.

Penalty in 1978

In 1978, when high-value currency notes were last demonetised, the High Denomination Bank Notes (Demonetisation) Act 1978 laid out penalty provisions for those who furnished false details in the declaration accompanying the deposit of the demonetised currency notes, or for bank officials indulging in irregular activities during the exchange process.

The window for the deposit of old notes in 1978 was one week, from January 16 to January 24, 1978, but high-value notes of ₹1,000, ₹5,000 and ₹10,000, constituted less than one per cent of the total currency in circulation.