New Delhi: Huge chunks of old Rs 500 and Rs 1,000 notes - rendered useless after demonetisation - are lying with the central banks of Nepal and Bhutan, with India unlikely to exchange the notes.

Scrapped notes worth around Rs 950 crore are with the Nepal Rastra Bank and the Royal Monetary Authority of Bhutan.

Top finance ministry officials said it would be difficult, if not impossible, to accept Nepal's stock of old notes as the two countries have no formal treaties to allow the use of each other's currencies.

Nepal has traditionally allowed the rupee to be used in its markets; India has similarly permitted Nepal's citizens, including the Gorkha soldiers with the Indian Army, to repatriate their earnings.

India's Fema (Foreign Exchange Management Act) laws also allow taking out up to Rs 25,000, while travelling to Nepal. Till 2014, Indian Rs 500 and Rs 1,000 notes were banned in Nepal on a request from the Indian government. However, the restriction was withdrawn in August 2015.

After India banned around 86 per cent of its currency by value in November 2016, both the central banks - Nepali and Bhutanese - sought to exchange the scrapped money with them. Despite several rounds of talks, no formal decision was reached.

"The notes lying with Nepal are not illegal nor is there any treaty which allows those notes to be officially exchanged," officials said.

However, since 1957, Nepal's Rastra Bank in consultation with the Reserve Bank of India has kept the Nepali rupee pegged at 1.6 to one Indian rupee and has exchange counters where Nepali citizens can exchange Indian currency for local currency. Bhutan, too, has similarly kept its Ngultrum pegged permanently to the rupee at a 1:1 ratio and allows the use of Indian currency in its markets.

Addressing reporters on the RBI's demonetisation data earlier this week, economic affairs secretary Subhash Chandra Garg had said, "There are very little chances that we will accept those Indian notes lying in Bhutan or Nepal."

Nepali officials, however, maintain that last year, the RBI officials had verbally told them each Nepali citizen would be allowed to exchange up to Rs 4,500.

India never officially communicated this to the landlocked nation.

Officials said the real reason for not accepting the scrapped notes was a lurking fear that the money may actually belong to India politicians in border states such as Uttar Pradesh, Bihar and Bengal.

However, for the ordinary citizens of Nepal and Bhutan stuck with the banned money this seems like a gigantic tax on them for no fault of theirs.