Which one of the following statements correctly describes the meaning of legal tender money?
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- AThe money which is tendered in courts of law to defray the fee of legal cases
- BThe money which a creditor is under compulsion to accept in settlement of his claims
- CThe bank money in the form of cheques, drafts, bills of exchange etc.
- DThe metallic money in circulation in a country
Show answer
Answer: (B) The money which a creditor is under compulsion to accept in settlement of his claims
Correct Answer: (b) The money which a creditor is under compulsion to accept in settlement of his claims.
Legal tender is money that is legally recognized and MUST be accepted as payment for debts.
If someone offers you legal tender to settle a debt, you are legally obligated to accept it.
You cannot refuse it.
In India, legal tender is:
- Coins issued by the Government of India
- Banknotes issued by the Reserve Bank of India
Why the other options are wrong:
- Option A: 'Money tendered in courts' — Legal tender has nothing to do with court fees specifically.
- Option C: 'Bank money like cheques, drafts' — Cheques and drafts are NOT legal tender. A shopkeeper can refuse a cheque, but cannot refuse cash (legal tender).
- Option D: 'Metallic money' — While coins are legal tender, the definition is broader than just metallic money.
REMEMBER: Legal tender = money that MUST be accepted by law for settling debts.
Coins + RBI Notes = legal tender.
Cheques, drafts, digital payments = NOT legal tender (they can be refused).
Legal tender money must be accepted by creditors to settle debts - no one can legally refuse coins or RBI banknotes as payment.
The question tests whether students understand that cheques, drafts, and digital payments are NOT legal tender and can be refused by merchants.
Legal Tender Money
Indian Economy legal tender money creditor compulsion settlement
Legal Tender Money: Definition, Types & UPSC Traps
Legal tender = money that creditors MUST accept by law for debt settlement
In India: RBI banknotes + Government coins = legal tender
Cheques, drafts, digital payments = NOT legal tender (can be refused)
Legal tender has unlimited acceptability for transactions
Core Definition
Legal tender money is currency that must be accepted by law when offered as payment for debts, taxes, or other obligations. A creditor cannot legally refuse legal tender — this compulsion distinguishes it from other payment methods.
Legal Tender vs Non-Legal Tender
Payment Method | Legal Status | Can Be Refused? | Example |
|---|---|---|---|
RBI Banknotes | Legal Tender | No | ₹500, ₹200, ₹100 notes |
Government Coins | Legal Tender | No | ₹10, ₹5, ₹2, ₹1 coins |
Cheques | Non-Legal Tender | Yes | Bank cheque payments |
Drafts/Bills | Non-Legal Tender | Yes | Demand drafts, bills of exchange |
Digital Payments | Non-Legal Tender | Yes | UPI, cards, net banking |
Key Features
Issued by authorized authorities: RBI for notes, Government of India for coins
Universal acceptance: Valid across the entire country for all transactions
Backed by government guarantee: Full faith and credit of the Indian government
Cannot be demonetized easily: Requires legal process and notification period
Question Context
This 2018 UPSC question tested the precise legal definition of legal tender. Option B correctly captures the compulsory acceptance aspect — the key distinguishing feature that separates legal tender from other payment instruments.
Trap: Confusing legal tender with 'court fee money' — legal tender has nothing to do with court proceedings specifically
Trap: Thinking cheques/drafts are legal tender — these can be refused by merchants, unlike cash
Trap: Limiting legal tender to only metallic money — banknotes are equally valid legal tender
Common mistake: Assuming digital payments are legal tender — UPI, cards can still be refused legally
Types of Money Classification
Indian Economy bank money cheques drafts metallic money
Types of Money: Legal Tender vs Bank Money Classification
Currency money (notes + coins) vs Bank money (deposits + instruments)
Metallic money = coins issued by Government of India
Bank money includes cheques, drafts, demand deposits — NOT legal tender
Fiat money = modern currency with no intrinsic value, backed by government
Money Classification
# Types of Money
## Currency Money
- Paper Notes (RBI)
- Metallic Coins (Govt)
- Legal Tender Status
- Physical Form
## Bank Money
- Demand Deposits
- Cheques
- Drafts
- Bills of Exchange
## Digital Money
- UPI Payments
- Credit/Debit Cards
- Net Banking
- E-wallets
## By Acceptability
- Legal Tender
- Non-Legal Tender
- Limited Acceptance
- Universal AcceptanceCurrency vs Bank Money Features
Feature | Currency Money | Bank Money | Digital Money |
|---|---|---|---|
Physical Form | Notes + Coins | Paper instruments | Electronic only |
Issuing Authority | RBI + Government | Commercial banks | Banks + Fintech |
Legal Tender Status | Yes | No | No |
Acceptability | Compulsory | Optional | Optional |
Backing | Government guarantee | Bank's creditworthiness | Bank account balance |
Liquidity | Highest | High (if honored) | High (if accepted) |
Indian Context
RBI issues banknotes under Section 22 of RBI Act — ₹2 to ₹2000 denominations
Government of India issues coins under Coinage Act 2011 — ₹1 to ₹20 denominations
Cheques governed by Negotiable Instruments Act 1881 — not legal tender but widely used
Digital payments promoted under Digital India — convenient but not mandatory to accept
Trap: Assuming all 'money' is legal tender — bank money like cheques is money but NOT legal tender
Trap: Thinking metallic money is the only legal tender — paper currency is equally valid
Trap: Confusing 'bank money' with 'money issued by banks' — includes demand deposits and instruments
Recent trend: Questions may test digital currency vs legal tender distinction as digital payments grow
RBI Currency Management Functions
Indian Economy
RBI's Role in Currency Issuance & Legal Tender Management
RBI has monopoly over banknote issuance in India (except ₹1 note)
Section 22 of RBI Act gives RBI power to issue currency notes
Government of India issues all coins and ₹1 notes through Finance Ministry
Minimum Reserve System used for note issuance since 1957
Legal Framework
The Reserve Bank of India Act 1934 grants RBI exclusive authority to issue banknotes in India. This monopoly ensures uniform currency standards and prevents multiple agencies from creating legal tender, which could destabilize the monetary system.
Currency Issuance Authority
Currency Type | Issuing Authority | Legal Basis | Denominations |
|---|---|---|---|
Banknotes | Reserve Bank of India | Section 22, RBI Act 1934 | ₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹500, ₹2000 |
₹1 Note | Government of India | Currency Act provisions | ₹1 (special case) |
Coins | Government of India | Coinage Act 2011 | 50p, ₹1, ₹2, ₹5, ₹10, ₹20 |
Commemorative | Both RBI + Govt | Joint decisions | Special occasions only |
Currency Distribution Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`****RBI Issues Notes****
Based on demand estimation and monetary policy requirements`"]
s2["`****Currency Chests****
RBI distributes to authorized bank branches across India`"]
s3["`****Commercial Banks****
Banks collect currency from chests based on customer demand`"]
s4["`****Public Circulation****
Currency reaches individuals and businesses through banking system`"]
s1 --> s2
s2 --> s3
s3 --> s4Key Powers & Responsibilities
Note printing oversight: RBI supervises currency printing at government presses in Nashik, Dewas, Mysore, Salboni
Anti-counterfeiting: RBI designs security features and monitors fake currency circulation
Demonetization authority: RBI can withdraw legal tender status with government approval
Clean note policy: RBI ensures availability of good quality notes through replacement mechanisms
Trap: Assuming RBI issues all currency — Government issues coins and ₹1 notes
Trap: Confusing currency printing with currency issuance — printing is done by government presses, issuance authority lies with RBI
Historical trap: Before 1935, Presidency Banks issued notes — RBI centralized this function
Current affairs: Questions on new currency features, demonetization powers often appear