UPSC CSE Prelims
Evolution and Functions of Money Previous Year Questions (PYQs)

Detailed Explanation:

Answer: Option 2 — The money which a creditor is under compulsion to accept in settlement of his claims

Legal tender is any form of payment recognized by law that a creditor is legally obligated to accept for the settlement of a debt or financial obligation. The defining characteristic of legal tender is the legal compulsion on the creditor—if a debtor offers legal tender to settle a claim, the creditor cannot refuse it and subsequently sue for non-payment of the debt.

Why other options are incorrect:
❌ Option 1 – Incorrect: This misinterprets 'legal tender' as money used in legal proceedings, which is not the correct definition.
❌ Option 3 – Incorrect: Cheques, drafts, and bills of exchange are 'fiduciary money' whose acceptance depends on trust between parties; creditors are not legally compelled to accept them and can insist on cash payment.
❌ Option 4 – Incorrect: Legal tender includes both metallic coins and paper currency notes; defining it solely as metallic money is incomplete.

📝 Short Notes: Legal Tender Money

• Definition: Legal tender is the form of payment that must be accepted by law for settlement of debts and obligations within a jurisdiction.
• In India: Currency notes issued by the Reserve Bank of India (RBI) and coins issued by the Government of India constitute legal tender under the Reserve Bank of India Act, 1934 and the Coinage Act, 2011.
• Legal Compulsion: A creditor cannot refuse legal tender offered for debt settlement; refusal may result in the debtor being discharged from the obligation.
• Limitations on Coins: Under the Coinage Act, 2011, coins are legal tender only up to certain limits (e.g., ₹1,000 for coins of ₹10 denomination and below).
• Bank Money vs Legal Tender: Cheques, drafts, and bills of exchange are not legal tender as their acceptance is voluntary and based on mutual trust (fiduciary money).
• Demonetization Impact: When currency is demonetized (as in 2016), those notes cease to be legal tender from the specified date.