The Prime Minister said in a televised address that all the 500 and 1,000 denomination notes can be deposited in banks and post offices between November 10 and December 30.
They can also be exchanged across the bank counters by showing government-issued ID proof.
New Rs 500 and Rs 2,000 denomination notes will be issued, he said.
“The existing 500 and 1,000 denomination notes can no more be used for transactions,” Modi said, speaking first in Hindi and then in English. “They are now only mere paper.”
The Prime Minister said these measures will help the government to fight corruption, black money and counterfeit currency, which he alleged was funding terrorism.
Modi said this was being done to tackle the menace of black money in the country, which he said had sapped the economy.
He also said that ATM withdrawals will be restricted to Rs 2,000 per day till November 11, after which this limit may be increased slowly.
Withdrawals from bank accounts will be limited to Rs 10,000 for the first few days, he said.
Banks have also been ordered to remain shut on Wednesday.
Modi said that for medical reasons, the old notes will continued to be accepted till November 11.
He also said that retail petrol pumps will accept such notes till November 11, after which they will have to keep a register of such notes for some time.
Tuesday’s far-reaching decisions came after a cabinet meeting.