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November 4, 2018

Advantages and Disadvantages of Demonetisation

It has been almost a year and a half since government demonetised 500 and 1,000 rupees notes. It was a major decision which had its impact on all sections of the society. Now, everyone wants to know if it was a masterstroke by the government or a setback to the nation. Demonetisation gave a new direction to the way people do monetary transactions in India and attempted to destroy parallel economy. Just like a coin has a flip side, demonetisation too has its advantages and disadvantages.

Advantages of Demonetisation

If we are to believe the supporters of demonetisation, the government has successfully completed its demonetisation drive and the Indian economy has made some major gains. Here is what the supporters of demonetisation have to say about the benefits of demonetisation:

  1. A major achievement of demonetisation has been that it has helped the government in tracking black money. The government claimed that large sums of black money were kept hidden by tax evaders and demonetisation has helped it uncover the huge amount of unaccounted cash. According to estimates made by RBI during the demonetisation drive, people had deposited more than rupees 3 lakh crores worth of black money in the bank accounts.
  2. A major reason behind demonetisation was that a big part of black money was being used for funding terrorism, gambling, in inflating the price of major assets classes like real estate, gold and other social evils. Demonetisation is acting as an effective countermeasure against such activities. Now all such activities are expected to get reduced for some time. If the claims are correct then it should take years for people to generate that amount of black money again and hence in a way it helps in putting an end this circle of people doing illegal activities to earn black money and using that black money to do more illegal activities.
  3. Another expected benefit was that due to people disclosing their income by depositing money in their bank accounts, the government will get a good amount of tax revenue which can be used by it towards the betterment of society by providing good infrastructure, hospitals, educational institutions, roads and many facilities for poor and needy sections of society.
  4. Another major objective of the government achieved through demonetisation was to push the Indian economy towards becoming cashless. The government succeeded in encouraging people to use digital means for making transactions.
  5. Economy has witnessed close to 20% decline in currency in circulation, number of taxpayers has considerably increased and a large number of shell companies have been identified.

Disadvantages of Demonetisation

On the other hand, the critics of demonetisation have a completely different opinion about the effects of demonetisation on the Indian economy. Here is what they have to say about the drawbacks of demonetisation:

  1. The biggest disadvantage of demonetisation has been the chaos and frenzy it created among common people initially. Everyone was rushing to get rid of demonetised notes while the inadequate supply of new notes affected the day to day budgets of citizens. Banks and ATMs witnessed long queues while small businesses suffered temporary financial losses. The situation was even worse in rural India where people struggled to exchange and withdraw cash due to lack of enough number of banks and ATMs in their vicinity.
  2. Another disadvantage is that destruction of old currency units and printing of new currency units involve costs which has to be borne by the government and if the costs are higher than benefits then there is no use of demonetisation.
  3. Another problem is that this move targeted the black money, but many people who had not kept cash as their black money and rotated or used that money in other asset classes like real estate, gold and so on were not affected by demonetisation. It turned out that more than 99% of demonetised currency came back to the RBI and was accounted for. Therefore, the government’s claim about black money fell on its face.

So, we can conclude that demonetisation has both advantages and disadvantages. Demonetisation alone cannot fight parallel economy and eliminate black money. Several other supportive measures are required by the government to change the economy for good. Moreover, it is critical to emphasise that demonetisation was a unique event, and hence, drawing inferences based on theory, armchair analysis or even short-term data, could lead to misleading conclusions. Serious research needs to be done extremely carefully and reasonably long-term data must be considered before reaching any conclusion about unprecedented policy events such as demonetisation. This becomes even more important when there are other related moving parts such as goods and services tax (GST), clean-up of the banking system, real estate sector reform and others going on at the same time. So, at the moment, it is better to wait a bit longer until complete analysis of demonetisation’s effects is done to reach the correct conclusion.

Demonetisation’s Importance in Income Tax Return filing

The government has given the tax evaders many opportunities to come clean through the Income Declaration Scheme and new Taxation Laws (Second amendment bill). The bill contains some heavy penal provisions for the tax evaders. Persons who declared their income during the demonetisation period without declaring its source were required to pay 50% in taxes. This included 30% tax on declared income plus 33.33% surcharge on tax i.e., 10% plus a penalty of 10% of declared income total 50% of the income. Not only this, persons were also required to deposit an amount equal to 25% of declared income in the Pradhan Mantri Gareeb Kalyan Yojana (PMGKY), 2016 account on or before 30th April 2017. These deposits were to be made for a period of 4 years. Hence, those who made these deposits will get that income back after 4 years but without any interest. The declaration in Form No. 1 under PMGKY was required to be filed by 10th May 2017.

But if you failed to declare the undisclosed income (cash deposits during the demonetisation period) under PMGKY and are subsequently identified by the tax department, then you will have to face the following consequences:

  1. If you are able to relate your deposits to any specific Financial Year and are able to show and explain the source of such income, then you can pay taxes as applicable on such income along with the applicable interest and penalty of 30% of the admitted income.
  2. However, if you are either not able to show the year in which the income was earned or explain how it was earned, then you will have to pay taxes as applicable on such income along with the applicable interest and penalty of 60% of the admitted income.

Therefore, it is important for you to file the Income Tax Return for AY 2017-18 (FY 2016-17) very carefully and declare the cash deposited during the demonetisation period in an appropriate manner.

A taxpayer who has not opted for the PMGKY scheme but offers his black money in his Income Tax Return will have to pay tax and penalty at the rate of 77.25 percent. But those who do not file the return under the scheme and are caught later with undisclosed income in any scrutiny assessment will have to pay 83.25 percent of the undisclosed income as tax and penalty.

The penalty is even more severe if you did not declare your cash deposits during demonetisation either under PMGKY or in your tax return for AY 2017-18. Ifi a raid is conducted on you in such a case, then you will have to pay 107.25 /137.25 percent tax and penalty depending on whether you surrender your undisclosed income during the search or not.

What to do if you did not Declare your Income?

Fortunately, it is still not too late for those who have yet not declared their unaccounted cash deposits. They can still file or revise their tax return for AY 2017-18 on or before 31st March 2018 by declaring it in the appropriate manner and paying the due taxes on it. Remember 31st March is the last date for filing the tax return for AY 2017-18 & 2016-17. So, if any of your unaccounted cash relates to any of these two years, you should immediately file / revise your tax return and set the things right.

Tax experts at H&R Block India can help you declare your income in the right manner and e-file your tax return accurately.

Latest Update: Press Release by CBDT on Impact of Demonetisation – Dated  31-8-2017

CBDT disclosed information on how demonetisation affected black money and helped in widening of tax base and direct tax collections.

Increase in Surveys, Searches & Detection of Black Money

Based on demonetisation data, the government boosted its enforcement actions which had the following results:

  • There was 158% increase in number of searches (from 447 to 1152 groups)
  • The number of seizures increased by 106% (from Rs. 712 crore to Rs.1469 crore)
  • There was 38% increase in admission of undisclosed income (from Rs. 11226 crore to Rs. 15496 crore)
  • The government conducted 183% more surveys (from 4422 to 12520)
  • Increase in the number of survey resulted in 44% increase in the detection of undisclosed income (from Rs. 9654 crore to Rs. 13920 crore)

Increase in Return Filing and Tax Collection

  • The number of e-returns of Individual taxpayers filed till 5th August, 2017 (due date of filing) increased to 2.79 crore from 2.22 crore returns filed during the corresponding period of last year, registering an increase of about 57 lakh returns (25.3%).
  • The total number of all returns (electronic + paper) filed during the entire Financial Year 2016-17 was 5.43 crore which is 17.3% more than the returns filed during FY 2015-16.
  • For FY 2016-17, 1.26 crore new taxpayers (return filers + non-filers making tax payments) were added to the tax base (till 30.06.2017).

Increase in Direct Tax Collection

  • Collection of Advance Tax under Personal Income Tax (i.e. other than Corporate Tax) as on 05.08.2017 showed a growth of about 41.79% over the corresponding period in F.Y. 2016-2017.
  • Collection of Self Assessment Tax under Personal Income Tax showed a growth of 34.25% over the corresponding period in F.Y. 2016-2017.
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Niteesh Singh
Niteesh Singh
Niteesh works as a Tax Researcher at H&R Block India. He makes taxes easy to understand for people. He creates content for the website, marketing activities and social media. He carries experience in creating a wide variety of content like blogs, press releases, research papers, etc.


  1. manoj divatia says:

    In my opinion the biggest advantages is that large number of PEPOLE started using digital
    Transactions. Beginning of Less Cash ? appears to make sense in people at large. A lesson
    Taught by PM very roughly and toughly. ALL SUCH NON CASH TRANSACTIONS LEAVE THEIR
    REGARDING black money or its other implications on reduced Terrorist activity are , in my opinion
    Not very effective.
    As per PAC questions to RBI Gov regarding DEMONETIZATION few are very candid. Ratio of GDP to cash for India was @12% which as per PAC is not significantly high in comparison to other countries. So what lead to DEMONETIZATION of almost 87% of cash ?
    RBI has yet Not declared amount of so called black money deposited in those Jan Dhan Acs.

    • safal says:

      nice comment

    • SRINIVAS says:



  2. Vilwa says:

    Democratisation changed poor peoples faith and pushed them into problems but also it is to look helpful

  3. Erica says:

    This article is very useful and publisher has really done well

  4. anu says:

    Due to demontisation corruptionn reduced and also some what better to poor people

  5. Amul says:

    Excellent article.

  6. Priya says:

    Nice but give some more information

  7. Yaghika says:

    Very nice article….. Satisfied

  8. SRINIVAS says:


  9. tamilselvan says:

    Every think fine but till now modi government after this issue do not discuss about it they doing there regular work i think this for unused plan for india

  10. Siddharth says:

    Write more about it

  11. Debanand says:

    Very Nice . Actually the black money with the black minded people will remain always in black. Change is required in thinking among those people.

  12. Merin says:

    Its a nyz article d publishr had publishd vry well tnakzz 4 that

  13. Nihal Dixit says:

    I have a question,
    1.Since black money is claimed to be used for funding terrorists and we have the stats that almost all the money(black+white) came into accounts so how is the terrorist funding prevented by this? People can still fund them that too with cash.

  14. Diksha Behera says:

    You can add the current information given by RBI about demonetization to your second point as a fact that can make the point more satisfied to the reader but otherwise it is good in brief. Thankyou

  15. Diksha. Behera says:

    We can also include the point that the government says that the money flowed into the system could be converted into white money after deducting the liability and some penalty… In favour… Thank you…

  16. Sanjivan says:

    Simple article for understanding quickly…..

  17. Rama says:

    Nice. Very useful articles

  18. Venkatesh says:

    Thanks for the information

  19. Balakrishna Shanbhogue says:

    Whether the demonetisation benefited or otherwise. Government intention is good. To track black money through banking Channel. It is succeeded. Tax payers increased, Tax collection increased. People become ( or made ) responsible to pay the tax. It has come to once’s mind ‘ Henceforth we can not cheat Government’
    I am happy over the bold step taken by the Government which has more things to tell on later days

  20. Arvind Kumar says:

    The only benefit of Demonetisation is increase in tax collection and increased tax payers… But cost paid for this is huge economically and socially.

    1. As you said 99% of black money is back so how it helped in tackling black money..recently Panama and paradise papers revealed names of big coperates and celebrities having offshore accounts accounting to huge black money, what has been done about that. Even a failed state like Pakistan has took action on his PM as his relatives name came up in that.

    2. During initial days of Demonetisation, terrorist funding, property buying, gambling all these activities did reduce and it was obvious as there was cash crisis.. Didn’t we all face this problem. New notes are still being counterfeited as there are no new security features(nano chip anyone) .. With introduction of 2000 notes it is easier to accumulate black money. You are living in fools paradise if you think it will eradicate corruption and black money.

    3. The only benefit of Demonetisation is tax collection which was the main motive of government but this costed huge to us as a nation.. 15 20 lakh job loss, 100 plus deaths.. Gdp decrease by 2 3% and don’t forget cost of printing new notes and managing Demonetisation. Government would have gathered way more than 16000cr if it only forced big coperates like ambanis and adani to cough up the black money which investigating agencies have found them to have deposited in offshore accounts but then who will fund political parties.

    4. During cash crisis, government changed its goal post to cashless economy as it was benefial to them in collecting tax but this lasted for few months. This kind of transformation doesn’t happen overnight…it was a step taken to counter cash shortage. Majority of Indians don’t have access to internet, many don’t know how to operate it for transactions and get cheated. We don’t have infrastructure for it as yet. In addition to that there was some fee deduction in doing transactions. We all know what happened in dhasai village( if you don’t just google it).

    5. If you wipe out 85% of total currency and deposit it in bank.. It will result in declined currency flow and increased taxpayers temporarily.. After a year or so it will come back as before.. Government claimed to identified lakhs of shell companies but what action have been taken as of yet any news?? Whole government came up in defence of a private businessman name jay shah when question was raised of his business… Just like Congress did for robert vadra.

  21. Arvind Kumar says:

    It is very easy to let other suffer and gain from it. The day any government makes political funding fully transparent and deal in cashless way, I will not doubt the intention of that government. The government has to lead the way.

  22. Sandeep Singh Rawat says:

    It was without a doubt the bold move by the government. Demonitisation makes one aware about there money spending and also there are lot of things now connected to aadhar card it’s​ now very difficult to avoid taxes and make any type of false claim. Modi government shown it’s strength.It will definitely benefit us in future.

  23. jay chandeliya says:

    nice article useful, easy to understand in easy language. thank you

  24. Manish Khurana says:

    Every decision has some positive and negative effects, so is for de-monetisation step taken by the government. The tax base has increased but the volume of business in the local market is considerably affected. As a result, there is lot of uncertainly and businesses are showing signs of slow down. On the top of it, GST has created a negative mindset in the minds of traders. Tax base has increased due to fear factor among the traders and this needs to be seen how long will the new tax payers adhere to filing of taxes. The salaried class has no option but to comply with the tax rules. Demonetisation should be done in phased manner like only Rs 1000 notes should be made invalid on Nov 8′ 2016. After a week or two weeks time, Rs 500 currency to be made invalid. The business would not have suffered as the Rs 500 currency was available in the market and there would not have been so much panic among the public.. Secondly ATM were caliberted to work with old Rs 500 notes. The impact would have been minimised on Bank staff who had to overtime. Its very early to decide on the pros and cons of this decision and only time will tell

  25. Niku says:

    Magic and creativity ki missal

  26. vinimay says:

    The process of demonetization was executed by individuals who had no qualification and knowledge in economics and commerce. It was done purely with the intention of beating rival political parties in state elections. It was a colossal gamble. which did not happen to ruin entire national economy, by chance.

  27. vinimay says:

    Demonetization must have been very smart move in the history of India. That is why so many guys are relentlessly praising it. This is Digital India.

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