I withdrew money from XYZ bank to pay my rent today. The landlord being a much smarter guy could make out that 2 500-rupee notes were FAKE! Yes, the same notes that the ATM machines dispensed…

How to identify a fake note

Watermarks
Hold the note to bright light. In the watermark window (the enclosure right above the Ashoka Pillar emblem), a Gandhi portrait will zoom into focus. Look closely at the finely-etched multi-directional lines, and at the expression on Gandhi’s face…  In a fake note, because there are no lines and no shading, it will look like a caricature.

See-through register
There is a small floral design on the front (hollow) and back (filled-up) of the note. You will find it bang in the middle of the vertical band to the left of the watermark. When held up against light, it should appear as one design. In a fake note, the design distorts since the printing machine can only print one side at a time. So, you will see two designs instead of one.

Tactile Clues
In a Rs 500 note, a circle-shaped mark in intaglio on the left of the watermark window helps the visually impaired identify the denomination. The shape varies with the denomination: Rs 20, vertical rectangle; Rs 50, square; Rs 100, triangle; Rs 1000, diamond. This feature can be imitated, but in a poor fake, the shape of the mark could be wrong.

Intaglio Painting
Mahatma Gandhi’s portrait, the RBI seal, the guarantee and promise clause, the Ashoka Pillar Emblem on the left and the RBI Governor’s signature are all printed in intaglio, that is, raised print. If you gently run your fingers over a genuine note, you can feel the raised print. Since intaglio printing is prohibitively costly, counterfeiters have not been able to reproduce it.

Security thread
A readable security thread lies to the left of the Mahatma’s portrait. On the obverse, it’s discontinuous with the inscriptions ‘Bharat’ (in Hindi), and ‘RBI’. On the reverse, it’s fully embedded with the two inscriptions appearing alternately. A real note should have a security thread that is silver and woven. In a fake, the thread stands out unevenly on the obverse and on the reverse, the colour is blackish.

Optically variable ink
The numeral 500 on the obverse is in colour-shifting ink. Much like disco lights, the numeral appears green when the note is held flat but changes to blue when the note is tilted. Notes issued before November 2000 don’t have this feature. In fake notes, the numeral’s colour will be pale and uniform.

Fluorescence
Place the note under an ultra-violet lamp and you will see optical fibres and fluorescent number panels. The security thread too fluoresces (in blue) on the visible portion from obverse and as a continuous line from reverse. A fake note will glow blue uniformly; in an original, only the number panels and silver security line will glow. Reason: genuine notes are made of cotton pulp; fakes, made of wood pulp or paper, don’t lend themselves to differential fluorescence.

Microlettering
Best seen under a magnifying glass, this feature appears between the vertical band and Mahatma Gandhi portrait. It contains the words ‘RBI’ and ‘500’ in microletters. Rule of thumb: check for ‘500 RBI’ just behind Gandhiji’s ears. If it’s not there, the note is surely a fake.

Latent image
The vertical band on the right side of the Mahatma Gandhi portrait contains a latent image of the denomination in numeral. The image is visible when the note is held up at eye level and horizontally against light. In a real note, the numeral will show up clearly against the light. In a fake, it will appear as a shadow, diffused and vague. 

Hope this helps the next time you are trade in large amounts.

Beware of fake notes! 

[PS Btw any suggestions on what I can do with the fake notes I have?]

[source: http://www.outlookmoney.com/scripts/IIH021C1.asp?sectionid=10&categoryid=94&articleid=4872]