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(Updated May 2015) As per RBI Circular Number RBI/2013-14/648 dated June 19, 2014 on Export and Import of Indian Currency, the limits on carrying Indian currency while entering and exiting India were revised, rather liberalised. According to this circular, all residents and non-residents (except citizens of Pakistan and Bangladesh and also other travellers coming from and going to Pakistan and Bangladesh) were allowed to take out Indian currency notes up to Rs. 25,000 while leaving the country. The norms are a little different for citizens of Pakistan and Bangladesh and also for travel to/from Pakistan, Bangladesh, Nepal, and Bhutan in terms of the amount of Indian currency and the denomination of currency notes that can be carried. Keep reading for details and subsequent updates…
The above circular states that

any person resident in India:

may take outside India (other than to Nepal and Bhutan) currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.25,000 (Rupees twenty five thousand only); and

who had gone out of India on a temporary visit, may bring into India at the time of his return from any place outside India (other than from Nepal and Bhutan), currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.25,000 (Rupees twenty five thousand only).

Any person resident outside India,

not being a citizen of Pakistan and Bangladesh and also not a traveller coming from and going to Pakistan and Bangladesh, and visiting India:

i) may take outside India currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs. 25,000 (Rupees twenty five thousand only) while exiting only through an airport.

ii) may bring into India currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs. 25,000 (Rupees twenty five thousand only) while entering only through an airport.”

Link to RBI Circular: https://www.rbi.org.in/SCRIPTs/NotificationUser.aspx?Id=8949&Mode=0

Restriction on the Denominations of Indian Currency

This one got revised so I will only give the information on the revised instructions:

As per RBI Circular Number RBI/2014-15/424 dated January 22, 2015,

“With a view to mitigating the hardship of individuals visiting from India to Nepal or Bhutan, it has now been decided that, an individual may carry to Nepal or Bhutan, currency notes of Reserve Bank of India denominations above Rs.100/-, i.e. currency notes of Rs.500/- and/or Rs.1000/- denominations, subject to a limit of Rs.25000/-.”

This means that the earlier problem with using Indian currency notes of Rs. 500 and Rs. 1000 denominations in Nepal and Bhutan is solved at least technically from the Indian side. There may still, however, be local issues/instructions that will need to change before these bigger denomination Indian currency notes can be freely accepted in Nepal and Bhutan.

Link to RBI Circular: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9510&Mode=0