No. Using an arbitrary piece of paper for a transaction isn't illegal, is it? If two individuals in India agree to an exchange of goods, but with USD instead o

No. Using an arbitrary piece of paper for a transaction isn't illegal, is it? If two individuals in India agree to an exchange of goods, but with USD instead of INR, that isn't illegal, is it? It's just that whoever received that amount in USD can't deposit it in an Indian bank; not without converting it into INR in the first place, at which point they're effectively depositing INR. Replace USD above with any paper currency, or non-currency paper for that matter. If you have someone willing to take a piece of paper from you in return for something, there, you have a transaction. It's just that, the other person would be unwise to accept a piece of paper they can't put to use. A ₹1000 note being "not legal tender" simply means that no Indian bank will accept it being worth one thousand INR. If someone wants to accept such notes in return for anything, they can; they just can't deposit it in an Indian bank (after December 30). A ₹1000 note being "illegal" would mean that it would be a crime to possess, offer, exchange, display, disperse, aerosolize, or apply some other action or combination of actions to it that isn't otherwise illegal already. And that, is not the case.