UPSC Prelims 2018 Q46: Indian Economy – Money and Banking
- (a) The money which is tendered in courts of law to defray the fee of legal cases
- (b) The money which a creditor is under compulsion to accept in settlement of his claims
- (c) The bank money in the form of cheques, drafts, bills of exchange, etc.
- (d) The metallic money in circulation in a country
Answer: (b) The money which a creditor is under compulsion to accept in settlement of his claims
Explanation
Legal Tender Money - Definition
Legal tender is money that a creditor is legally bound to accept in discharge of a debt or in settlement of claims. Refusal to accept legal tender in settlement invalidates that portion of the debt.
| Option | Correct? | Detail |
|---|---|---|
| (a) Money tendered in court for legal fees | NO | This is a play on the word 'tender'; nothing to do with monetary economics. |
| (b) Money creditor is under compulsion to accept in settlement of his claims | YES | Precise economic definition of legal tender. |
| (c) Bank money - cheques, drafts, bills of exchange | NO | These are near-money / credit instruments, NOT legal tender; a creditor may refuse them. |
| (d) Metallic money in circulation | NO | Both metallic (coins) and paper currency can be legal tender; the definition is about legal acceptability, not physical form. |
Indian context: In India, coins are legal tender up to certain limits (Coinage Act 2011): 50 paise up to Rs 10; Re 1 and above up to any sum. Currency notes issued by RBI are unlimited legal tender. Cheques are NOT legal tender.
Answer: (b) The money which a creditor is under compulsion to accept in settlement of his claims.
Why each option is right or wrong
- (a) Incorrect. This is a wordplay on 'tender' - the term 'legal tender' has nothing to do with court fees.
- (b) CORRECT. Legal tender is defined by the legal obligation on a creditor to accept it in settlement of claims.
- (c) Incorrect. Cheques, drafts and bills of exchange are credit/near-money instruments; a creditor is NOT bound to accept them.
- (d) Incorrect. Metallic circulation is a subset; legal tender covers both coins (limited) and notes (unlimited) in India.
Key point
Legal tender = creditor's legal duty to accept in settlement. In India, RBI-issued notes are unlimited legal tender; coins have limits per the Coinage Act 2011. Cheques are NOT legal tender.
Remember
Legal tender money is defined as the money that a creditor is legally bound to accept in settlement of his claims. In India, currency notes issued by the RBI are unlimited legal tender, while coins are legal tender up to specified limits under the Coinage Act, 2011. Cheques and other credit instruments are not legal tender.
Common mistakes
- Confusing legal tender with 'money in general' - only currency that must be accepted for debts is legal tender.
- Assuming cheques and demand drafts are legal tender - they are convenient payment instruments but a creditor can refuse them.
- Missing the limited vs unlimited legal tender distinction for coins vs notes in India.
Exam tip
Legal tender in India: RBI notes (unlimited). Coins: 50 paise up to Rs 10; Re 1+ up to any sum (Coinage Act 2011). Cheques/DDs/UPI = NOT legal tender.
Sources
- RBI - FAQs on Currency Management
- Coinage Act, 2011 - Section 6 on Legal Tender