On 8^th November 2016 the entire nation was taken by surprise when the Prime Minister Sri Narendra Modi announced that on the stroke of midnight all 500 and 1000 banknotes would cease to be legal tender in India. In one go around 86 percent of the currency in circulation amounting to Rs. 14.18 lakh crore of money became just a piece of paper having no purchasing power. The aftermath of the decision of demonetization was that there was rush and long queues outside the banks, people trying to exchange old denomination notes for new and that too to a maximum limit of Rs. 4000 only at a time. At same time ATMs ran out of cash. People were left with almost with no cash to spend and all over a panic wave could be witnessed. The objective demonetizing high denomination notes was on one hand to curb the black money, control corruption and cut the supply base of terrorist activities. On the other hand the motive of this decision was to cleanse the economy of all illegal and unaccounted transactions and to promote digital transactions so that all transactions made by the people are monitored effectively thereby minimizing the chances of tax evasion putting a big dent to parallel economy. In this background the paper tries to analyze the reasons for withdrawal of 500 and 1000 denominated notes from circulation and its impact on economy post demonetization. The paper is based on secondary source of information collected from various websites, research articles, magazines and newspapers.