Q. Which one of the following statements correctly describes the meaning of legal tender money?

  • The money which is tendered in courts of law to defray the fee of legal cases
  • The money which a creditor is under compulsion to accept in settlement of his claims
  • The bank money in the form of cheques, drafts, bills of exchange, etc.
  • 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

  • It is a type of currency or medium of exchange. 
  • Legal tender is any official medium of payment recognized by law that can be used to extinguish a public or private debt, or meet a financial obligation.
  • The national currency is legal tender in practically every country.
  • A creditor is obligated to accept legal tender toward repayment of a debt.
  • Legal tender is constitutioned by a law that specifies the object to be utilised as legal tender and the organisation that is commissioned to create and issue the same to the public such as the Reserve Bank of India.
  • In India, the authentic legal tender of the Reserve Bank of India consists of coins and notes. The creditors are supposed to accept them as a payment towards the debt.
  • Banknotes and coins are two types of legal tender money in India. Every banknote issued by Reserve Bank of India (₹2, ₹5, ₹10, ₹20, ₹50, ₹100, ₹200, ₹500 and ₹2000), unless withdrawn from circulation, shall be legal tender at any place in India.
    • As per Section 6 of The Coinage Act, 2011, the Government of India issued coins is a legal tender in India.
Fiat Money
  • Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation.
    • Traditionally, currencies were backed by physical commodities such as silver and gold, but fiat money is based on the creditworthiness of the issuing government.
  • The value of fiat money depends on supply and demand and was introduced as an alternative to commodity money and representative money.
    • Commodity money is created from precious metals such as gold and silver, while representative money represents a claim on a commodity that can be redeemed.