Banks are authorised to exchange mutilated and soiled currency also called banknotes.

According to the RBI a mutilated banknote can be exchanged for full value if:

(i) For denominations of Re 1, Rs 2, Rs 5, Rs 10 and Rs 20, the area of the single largest undivided piece of the note presented is more than 50 percent of the area of respective denomination, rounded off to the next complete square centimeter.

(ii) For denominations of Rs 50, Rs 100, Rs 500 and Rs 1000, the area of the single largest undivided piece of the note presented is more than 65 percent of the area of respective denomination, rounded off to the next complete square centimeter.

Banknotes in denominations of Re 1, Rs 2, Rs 5, Rs 10 and Rs 20, cannot be exchanged for half value.

A mutilated banknote in denominations of Rs 50, Rs 100, Rs 500 or Rs 1000, can be exchanged for half value if,

The undivided area of the single largest piece of the note presented is equal to or more than 40 percent and less than or equal to 65 percent of the area of respective denomination, rounded off to the next complete square centimeter.

Information Courtesy: Reserve Bank of India